The Nation's Financial Condition

[Farfromgeneva]

So I can’t get behind proclamations like higher corporate wages will guarantee a higher quality of life absent some discussion and analysis of the other factors involved.

Fair enough.

I suggest that you have a discussion on the subject with a social scientist or economist. I worked in the tax law field, am now retired, and have no expertise on either subject so I cannot possibly give you a more informed theory and analysis.

Ok that’s fine and I know where you stand so when you state higher wages won’t hurt corporate profits here and will lead to a better quality of life that’s a belief not rooted in deep analysis or data. We have the same goal in mind and I want better for everyone in general at least.

[Farfromgeneva]

Now this is interesting. I had some dealings indirectly with Direct Lending (DLIF) as they had backed a FinTech consumer lender years ago I worked with. The recapitalization was messy because their fund was already in receivership so just to pay them off/buy them out was a nightmare. It’s not just private credit, side pocket direct equity investments in businesses, real estate, viatical settlement assets, timber, water, etc. Valuations can have a truck driven through them.

Weak Oversight Plagues Audits of Billions in Private Assets
Self-regulatory audit system fails to safeguard charities, pension funds and private companies, a WSJ analysis finds

Big Four accounting firm Deloitte agreed to pay $31 million earlier this year to resolve claims of negligence after its auditors failed to detect an alleged fraud.
PHOTO: BENJAMIN GIRETTE/BLOOMBERG NEWS
By Jean Eaglesham and Coulter Jones
Updated Aug. 13, 2021 12:17 pm ET

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Six months before Los Angeles-based Shepherd University collapsed into bankruptcy in 2017, accounting firm BW CPA Group Inc. gave the school’s finances a clean bill of health.

State regulators called the audit “grossly deficient,” saying it missed red flags for potential fraud and left numerous errors in the financial statements uncorrected. The year before, BW CPA Group failed its second every-three-year peer review in a row, state regulators said.

Until regulators took disciplinary action in 2019, there was no way for the public to know that a fellow auditing firm twice took the rare step of giving a failing grade to BW CPA. The firm was banned from auditing last year.


Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors.

Of the firms that disclosed their results, 91% got the highest “pass” grade and only 4% the worst “fail” score on the three-grade scale, the analysis found. None of the biggest 100 firms failed, and 99% of them got the top “pass” score, according to the analysis.

Research by the government and data from the auditing industry trade group show significant flaws in audits of private organizations, particularly those done by smaller firms.

This self-policing system covers the vast majority of U.S. audits, including more than 5 million private companies, some with billions in revenue, Labor Department data show. It also affects tens of thousands of pension funds, endowments, local governments, charities and billions in government grants, according to the auditing industry trade group. Investors in these companies, pensioners, donors to charities and local taxpayers are among those who could lose if auditors fail to detect problems.

BW CPA Group didn’t respond to requests for comment. A lawyer representing Shepherd University declined to comment. A spokesman for the state regulator, the California Board of Accountancy, declined to comment on the yearslong delay in taking disciplinary action.

The entire auditing industry used to police itself but that ended after the accounting scandals of the early 2000s. Firms’ audits of public companies are now overseen by a government-appointed regulator.

But there were no changes to the rules that govern the audits of private entities. “It’s a big hole,” said Steven Thomas, a Venice, Calif.-based attorney who specializes in litigation against big accounting firms. “Having audits which can involve billions and billions of dollars only being regulated by the profession is insufficient to ensure the auditors are doing their job.”

A significant number of the audits covered by self-regulation are flawed, industry data suggests. More than one in four audits reviewed last year fell short of professional standards, according to the American Institute of Certified Public Accountants. The AICPA said it was “likely that [recently introduced] highly complex accounting standards” contributed to this high failure rate.

Pension Peril
Most firms auditing employee-benefit plans do only a few per year.
Most firms auditing employee-benefit plans do only a few per year.
Source: Labor Department
AUDITS PERFORMED
1 - 5
6 - 24
25 - 99
100+
0
500
1000
1500
2000
2500
3000
3500
Federal studies put the failure rates much higher for some types of audit. More than a third of a sample of audits of pension and other employee-benefit plans were found to have major deficiencies in a 2015 Labor Department report, for example. For firms doing fewer than 25 of these audits a year, more than two-thirds of audits were substandard, the study found. A department spokesman said its continuing enforcement work “continues to identify audit quality problems.”

The flawed audits potentially affect the savings of millions of people. More than 200,000 employee-benefit plans, with $449 billion in total assets, are audited by firms that do fewer than 25 such audits a year, a Journal review of data for plans in 2018 found.


The accounting industry says things have changed since the accounting scandals involving Enron Corp. and WorldCom Inc. in the early 2000s. The AICPA, which oversees the profession’s self-regulation, said in a statement it has taken “great strides…to update its standards, educate members and help firms remediate problem areas.”

The Journal’s analysis looked at 659 firms’ assessments of each other, known as peer reviews, reported on the AICPA’s website. This sample of about 3% of the nearly 24,000 firms in the peer-review program was chosen at random by scraping the website. The AICPA declined to allow the Journal access to its full database.

Almost one in five firms didn’t disclose their peer-review results, according to the analysis. The AICPA assures its members that their results will be published only if “authorized or permitted by the firm.”

Veiled Vetting
Results of audit firms' inspections by fellow auditors
Source: WSJ analysis of AICPA data
Note: About one in five firms don't disclose the results. Percentages are for those that do.Results from a sample of 659 firms' peer review reports published by the AmericanInstitute of Certified Public Accountants.
%
Pass
Pass with deficiencies
Fail
0
10
20
30
40
50
60
70
80
90
100
The AICPA data for peer reviews of firms’ audit systems from 2018 through 2020, including ones that kept their results secret, show that 7% got fail grades and fewer than four out of five, or 79%, a pass score, with the remaining 14% getting the middle “pass with deficiencies” grade.

“It’s like the sixth grade playground—no one tells on one another,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. This lack of accountability means there is little incentive for auditors to challenge a company’s management and risk losing that client, he added.

An AICPA official said most peer reviews are publicly available “through a variety of sources.” Anyone being audited can ask the accounting firm for a copy of its peer review, the official added.

The biggest firms’ near-perfect grading is in contrast with the assessments of their audit quality by the Public Company Accounting Oversight Board, an SEC-appointed watchdog that oversees audits of public companies.


Inspections of the top 100 firms by the PCAOB rate more than a quarter of their audits, on average, as having serious deficiencies, according to the Journal’s analysis. For the biggest 20 firms, the failure rate ranged from zero to 80% in their most recent PCAOB inspection reports.

Ken Bishop is chief executive of the National Association of State Boards of Accountancy, representing boards that license accountants to practice in individual states. He said that making checks on private-company audits as thorough as the assessments of public-company ones would cause tensions within the accounting profession.

“If you make it forensic, like PCAOB firm inspections…that [could] be damaging to the firm that you’re providing the peer-review services to,” Mr. Bishop said in an interview. The two systems have different aims, he said. “The PCAOB is looking out for investors, so it’s doing a much deeper dive.”

The AICPA said the firms subject to peer review are “committed to protecting the public interest through performing quality audits.”

Investors in private entities have been harmed by weaknesses in audits. Big Four accounting firm Deloitte LLP this year agreed to pay $31 million to resolve legal claims of negligence, after its auditors failed to detect an alleged fraud in private investment funds that cost investors hundreds of millions of dollars.


Brendan Ross, at a conference in 2017, was later accused by authorities of a multiyear fraud. He has pleaded not guilty.
PHOTO: PATRICK T. FALLON/BLOOMBERG NEWS
Deloitte was the auditor for Direct Lending Investments LLC, a Glendale, Calif.-based investment firm that advised private funds with assets totaling more than $800 million. The firm’s audits don’t say they were conducted under PCAOB oversight, which would be specified if that were the case.

Authorities last year arrested Direct Lending’s owner and former Chief Executive Brendan Ross, accusing him of a multiyear fraud that involved creating fictitious borrowers to pump up the apparent value of an investment in an online lender. Mr. Ross, who is on bail awaiting trial next year, has pleaded not guilty to 10 counts of wire fraud. His lawyer didn’t respond to requests for comment.


Deloitte’s auditors repeatedly accepted Direct Lending’s assurances at face value, rather than testing the evidence, a filing by a court-appointed receiver said. Deloitte’s “improper clean audit opinions” for the funds for 2016 and 2017 helped prolong the alleged fraud, increasing investors’ losses, the filing added.

Deloitte didn’t admit any liability in agreeing to the $31 million settlement of the investors’ and receiver’s claims. The settlement is awaiting court approval. The firm said that its audits conformed to the relevant accounting rules and didn’t breach its professional standards of care, according to a filing by the receiver. A spokesman for Deloitte declined to comment.

—Lisa Schwartz contributed to this article.

Write to Jean Eaglesham at [email protected] and Coulter Jones at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 14, 2021, print edition as 'Oversight Is Weak of Private-Firm Auditing.'

[PizzaSnake]

Now this is interesting. I had some dealings indirectly with Direct Lending (DLIF) as they had backed a FinTech consumer lender years ago I worked with. The recapitalization was messy because their fund was already in receivership so just to pay them off/buy them out was a nightmare. It’s not just private credit, side pocket direct equity investments in businesses, real estate, viatical settlement assets, timber, water, etc. Valuations can have a truck driven through them.

Weak Oversight Plagues Audits of Billions in Private Assets
Self-regulatory audit system fails to safeguard charities, pension funds and private companies, a WSJ analysis finds

Big Four accounting firm Deloitte agreed to pay $31 million earlier this year to resolve claims of negligence after its auditors failed to detect an alleged fraud.
PHOTO: BENJAMIN GIRETTE/BLOOMBERG NEWS
By Jean Eaglesham and Coulter Jones
Updated Aug. 13, 2021 12:17 pm ET

SAVE

SHARE

TEXT
88

Listen to article
Length 9 minutes

Queue
Six months before Los Angeles-based Shepherd University collapsed into bankruptcy in 2017, accounting firm BW CPA Group Inc. gave the school’s finances a clean bill of health.

State regulators called the audit “grossly deficient,” saying it missed red flags for potential fraud and left numerous errors in the financial statements uncorrected. The year before, BW CPA Group failed its second every-three-year peer review in a row, state regulators said.

Until regulators took disciplinary action in 2019, there was no way for the public to know that a fellow auditing firm twice took the rare step of giving a failing grade to BW CPA. The firm was banned from auditing last year.


Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors.

Of the firms that disclosed their results, 91% got the highest “pass” grade and only 4% the worst “fail” score on the three-grade scale, the analysis found. None of the biggest 100 firms failed, and 99% of them got the top “pass” score, according to the analysis.

Research by the government and data from the auditing industry trade group show significant flaws in audits of private organizations, particularly those done by smaller firms.

This self-policing system covers the vast majority of U.S. audits, including more than 5 million private companies, some with billions in revenue, Labor Department data show. It also affects tens of thousands of pension funds, endowments, local governments, charities and billions in government grants, according to the auditing industry trade group. Investors in these companies, pensioners, donors to charities and local taxpayers are among those who could lose if auditors fail to detect problems.

BW CPA Group didn’t respond to requests for comment. A lawyer representing Shepherd University declined to comment. A spokesman for the state regulator, the California Board of Accountancy, declined to comment on the yearslong delay in taking disciplinary action.

The entire auditing industry used to police itself but that ended after the accounting scandals of the early 2000s. Firms’ audits of public companies are now overseen by a government-appointed regulator.

But there were no changes to the rules that govern the audits of private entities. “It’s a big hole,” said Steven Thomas, a Venice, Calif.-based attorney who specializes in litigation against big accounting firms. “Having audits which can involve billions and billions of dollars only being regulated by the profession is insufficient to ensure the auditors are doing their job.”

A significant number of the audits covered by self-regulation are flawed, industry data suggests. More than one in four audits reviewed last year fell short of professional standards, according to the American Institute of Certified Public Accountants. The AICPA said it was “likely that [recently introduced] highly complex accounting standards” contributed to this high failure rate.

Pension Peril
Most firms auditing employee-benefit plans do only a few per year.
Most firms auditing employee-benefit plans do only a few per year.
Source: Labor Department
AUDITS PERFORMED
1 - 5
6 - 24
25 - 99
100+
0
500
1000
1500
2000
2500
3000
3500
Federal studies put the failure rates much higher for some types of audit. More than a third of a sample of audits of pension and other employee-benefit plans were found to have major deficiencies in a 2015 Labor Department report, for example. For firms doing fewer than 25 of these audits a year, more than two-thirds of audits were substandard, the study found. A department spokesman said its continuing enforcement work “continues to identify audit quality problems.”

The flawed audits potentially affect the savings of millions of people. More than 200,000 employee-benefit plans, with $449 billion in total assets, are audited by firms that do fewer than 25 such audits a year, a Journal review of data for plans in 2018 found.


The accounting industry says things have changed since the accounting scandals involving Enron Corp. and WorldCom Inc. in the early 2000s. The AICPA, which oversees the profession’s self-regulation, said in a statement it has taken “great strides…to update its standards, educate members and help firms remediate problem areas.”

The Journal’s analysis looked at 659 firms’ assessments of each other, known as peer reviews, reported on the AICPA’s website. This sample of about 3% of the nearly 24,000 firms in the peer-review program was chosen at random by scraping the website. The AICPA declined to allow the Journal access to its full database.

Almost one in five firms didn’t disclose their peer-review results, according to the analysis. The AICPA assures its members that their results will be published only if “authorized or permitted by the firm.”

Veiled Vetting
Results of audit firms' inspections by fellow auditors
Source: WSJ analysis of AICPA data
Note: About one in five firms don't disclose the results. Percentages are for those that do.Results from a sample of 659 firms' peer review reports published by the AmericanInstitute of Certified Public Accountants.
%
Pass
Pass with deficiencies
Fail
0
10
20
30
40
50
60
70
80
90
100
The AICPA data for peer reviews of firms’ audit systems from 2018 through 2020, including ones that kept their results secret, show that 7% got fail grades and fewer than four out of five, or 79%, a pass score, with the remaining 14% getting the middle “pass with deficiencies” grade.

“It’s like the sixth grade playground—no one tells on one another,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. This lack of accountability means there is little incentive for auditors to challenge a company’s management and risk losing that client, he added.

An AICPA official said most peer reviews are publicly available “through a variety of sources.” Anyone being audited can ask the accounting firm for a copy of its peer review, the official added.

The biggest firms’ near-perfect grading is in contrast with the assessments of their audit quality by the Public Company Accounting Oversight Board, an SEC-appointed watchdog that oversees audits of public companies.


Inspections of the top 100 firms by the PCAOB rate more than a quarter of their audits, on average, as having serious deficiencies, according to the Journal’s analysis. For the biggest 20 firms, the failure rate ranged from zero to 80% in their most recent PCAOB inspection reports.

Ken Bishop is chief executive of the National Association of State Boards of Accountancy, representing boards that license accountants to practice in individual states. He said that making checks on private-company audits as thorough as the assessments of public-company ones would cause tensions within the accounting profession.

“If you make it forensic, like PCAOB firm inspections…that [could] be damaging to the firm that you’re providing the peer-review services to,” Mr. Bishop said in an interview. The two systems have different aims, he said. “The PCAOB is looking out for investors, so it’s doing a much deeper dive.”

The AICPA said the firms subject to peer review are “committed to protecting the public interest through performing quality audits.”

Investors in private entities have been harmed by weaknesses in audits. Big Four accounting firm Deloitte LLP this year agreed to pay $31 million to resolve legal claims of negligence, after its auditors failed to detect an alleged fraud in private investment funds that cost investors hundreds of millions of dollars.


Brendan Ross, at a conference in 2017, was later accused by authorities of a multiyear fraud. He has pleaded not guilty.
PHOTO: PATRICK T. FALLON/BLOOMBERG NEWS
Deloitte was the auditor for Direct Lending Investments LLC, a Glendale, Calif.-based investment firm that advised private funds with assets totaling more than $800 million. The firm’s audits don’t say they were conducted under PCAOB oversight, which would be specified if that were the case.

Authorities last year arrested Direct Lending’s owner and former Chief Executive Brendan Ross, accusing him of a multiyear fraud that involved creating fictitious borrowers to pump up the apparent value of an investment in an online lender. Mr. Ross, who is on bail awaiting trial next year, has pleaded not guilty to 10 counts of wire fraud. His lawyer didn’t respond to requests for comment.


Deloitte’s auditors repeatedly accepted Direct Lending’s assurances at face value, rather than testing the evidence, a filing by a court-appointed receiver said. Deloitte’s “improper clean audit opinions” for the funds for 2016 and 2017 helped prolong the alleged fraud, increasing investors’ losses, the filing added.

Deloitte didn’t admit any liability in agreeing to the $31 million settlement of the investors’ and receiver’s claims. The settlement is awaiting court approval. The firm said that its audits conformed to the relevant accounting rules and didn’t breach its professional standards of care, according to a filing by the receiver. A spokesman for Deloitte declined to comment.

—Lisa Schwartz contributed to this article.

Write to Jean Eaglesham at [email protected] and Coulter Jones at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 14, 2021, print edition as 'Oversight Is Weak of Private-Firm Auditing.'

"Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors."

So they're jerking each other off and the whole thing is a farce? Nice. Good to see the exemplary private sector leading the way...

[Brooklyn]

Ok that’s fine and I know where you stand so when you state higher wages won’t hurt corporate profits here and will lead to a better quality of life that’s a belief not rooted in deep analysis or data. We have the same goal in mind and I want better for everyone in general at least.

Kudos

[Farfromgeneva]

Now this is interesting. I had some dealings indirectly with Direct Lending (DLIF) as they had backed a FinTech consumer lender years ago I worked with. The recapitalization was messy because their fund was already in receivership so just to pay them off/buy them out was a nightmare. It’s not just private credit, side pocket direct equity investments in businesses, real estate, viatical settlement assets, timber, water, etc. Valuations can have a truck driven through them.

Weak Oversight Plagues Audits of Billions in Private Assets
Self-regulatory audit system fails to safeguard charities, pension funds and private companies, a WSJ analysis finds

Big Four accounting firm Deloitte agreed to pay $31 million earlier this year to resolve claims of negligence after its auditors failed to detect an alleged fraud.
PHOTO: BENJAMIN GIRETTE/BLOOMBERG NEWS
By Jean Eaglesham and Coulter Jones
Updated Aug. 13, 2021 12:17 pm ET

SAVE

SHARE

TEXT
88

Listen to article
Length 9 minutes

Queue
Six months before Los Angeles-based Shepherd University collapsed into bankruptcy in 2017, accounting firm BW CPA Group Inc. gave the school’s finances a clean bill of health.

State regulators called the audit “grossly deficient,” saying it missed red flags for potential fraud and left numerous errors in the financial statements uncorrected. The year before, BW CPA Group failed its second every-three-year peer review in a row, state regulators said.

Until regulators took disciplinary action in 2019, there was no way for the public to know that a fellow auditing firm twice took the rare step of giving a failing grade to BW CPA. The firm was banned from auditing last year.


Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors.

Of the firms that disclosed their results, 91% got the highest “pass” grade and only 4% the worst “fail” score on the three-grade scale, the analysis found. None of the biggest 100 firms failed, and 99% of them got the top “pass” score, according to the analysis.

Research by the government and data from the auditing industry trade group show significant flaws in audits of private organizations, particularly those done by smaller firms.

This self-policing system covers the vast majority of U.S. audits, including more than 5 million private companies, some with billions in revenue, Labor Department data show. It also affects tens of thousands of pension funds, endowments, local governments, charities and billions in government grants, according to the auditing industry trade group. Investors in these companies, pensioners, donors to charities and local taxpayers are among those who could lose if auditors fail to detect problems.

BW CPA Group didn’t respond to requests for comment. A lawyer representing Shepherd University declined to comment. A spokesman for the state regulator, the California Board of Accountancy, declined to comment on the yearslong delay in taking disciplinary action.

The entire auditing industry used to police itself but that ended after the accounting scandals of the early 2000s. Firms’ audits of public companies are now overseen by a government-appointed regulator.

But there were no changes to the rules that govern the audits of private entities. “It’s a big hole,” said Steven Thomas, a Venice, Calif.-based attorney who specializes in litigation against big accounting firms. “Having audits which can involve billions and billions of dollars only being regulated by the profession is insufficient to ensure the auditors are doing their job.”

A significant number of the audits covered by self-regulation are flawed, industry data suggests. More than one in four audits reviewed last year fell short of professional standards, according to the American Institute of Certified Public Accountants. The AICPA said it was “likely that [recently introduced] highly complex accounting standards” contributed to this high failure rate.

Pension Peril
Most firms auditing employee-benefit plans do only a few per year.
Most firms auditing employee-benefit plans do only a few per year.
Source: Labor Department
AUDITS PERFORMED
1 - 5
6 - 24
25 - 99
100+
0
500
1000
1500
2000
2500
3000
3500
Federal studies put the failure rates much higher for some types of audit. More than a third of a sample of audits of pension and other employee-benefit plans were found to have major deficiencies in a 2015 Labor Department report, for example. For firms doing fewer than 25 of these audits a year, more than two-thirds of audits were substandard, the study found. A department spokesman said its continuing enforcement work “continues to identify audit quality problems.”

The flawed audits potentially affect the savings of millions of people. More than 200,000 employee-benefit plans, with $449 billion in total assets, are audited by firms that do fewer than 25 such audits a year, a Journal review of data for plans in 2018 found.


The accounting industry says things have changed since the accounting scandals involving Enron Corp. and WorldCom Inc. in the early 2000s. The AICPA, which oversees the profession’s self-regulation, said in a statement it has taken “great strides…to update its standards, educate members and help firms remediate problem areas.”

The Journal’s analysis looked at 659 firms’ assessments of each other, known as peer reviews, reported on the AICPA’s website. This sample of about 3% of the nearly 24,000 firms in the peer-review program was chosen at random by scraping the website. The AICPA declined to allow the Journal access to its full database.

Almost one in five firms didn’t disclose their peer-review results, according to the analysis. The AICPA assures its members that their results will be published only if “authorized or permitted by the firm.”

Veiled Vetting
Results of audit firms' inspections by fellow auditors
Source: WSJ analysis of AICPA data
Note: About one in five firms don't disclose the results. Percentages are for those that do.Results from a sample of 659 firms' peer review reports published by the AmericanInstitute of Certified Public Accountants.
%
Pass
Pass with deficiencies
Fail
0
10
20
30
40
50
60
70
80
90
100
The AICPA data for peer reviews of firms’ audit systems from 2018 through 2020, including ones that kept their results secret, show that 7% got fail grades and fewer than four out of five, or 79%, a pass score, with the remaining 14% getting the middle “pass with deficiencies” grade.

“It’s like the sixth grade playground—no one tells on one another,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. This lack of accountability means there is little incentive for auditors to challenge a company’s management and risk losing that client, he added.

An AICPA official said most peer reviews are publicly available “through a variety of sources.” Anyone being audited can ask the accounting firm for a copy of its peer review, the official added.

The biggest firms’ near-perfect grading is in contrast with the assessments of their audit quality by the Public Company Accounting Oversight Board, an SEC-appointed watchdog that oversees audits of public companies.


Inspections of the top 100 firms by the PCAOB rate more than a quarter of their audits, on average, as having serious deficiencies, according to the Journal’s analysis. For the biggest 20 firms, the failure rate ranged from zero to 80% in their most recent PCAOB inspection reports.

Ken Bishop is chief executive of the National Association of State Boards of Accountancy, representing boards that license accountants to practice in individual states. He said that making checks on private-company audits as thorough as the assessments of public-company ones would cause tensions within the accounting profession.

“If you make it forensic, like PCAOB firm inspections…that [could] be damaging to the firm that you’re providing the peer-review services to,” Mr. Bishop said in an interview. The two systems have different aims, he said. “The PCAOB is looking out for investors, so it’s doing a much deeper dive.”

The AICPA said the firms subject to peer review are “committed to protecting the public interest through performing quality audits.”

Investors in private entities have been harmed by weaknesses in audits. Big Four accounting firm Deloitte LLP this year agreed to pay $31 million to resolve legal claims of negligence, after its auditors failed to detect an alleged fraud in private investment funds that cost investors hundreds of millions of dollars.


Brendan Ross, at a conference in 2017, was later accused by authorities of a multiyear fraud. He has pleaded not guilty.
PHOTO: PATRICK T. FALLON/BLOOMBERG NEWS
Deloitte was the auditor for Direct Lending Investments LLC, a Glendale, Calif.-based investment firm that advised private funds with assets totaling more than $800 million. The firm’s audits don’t say they were conducted under PCAOB oversight, which would be specified if that were the case.

Authorities last year arrested Direct Lending’s owner and former Chief Executive Brendan Ross, accusing him of a multiyear fraud that involved creating fictitious borrowers to pump up the apparent value of an investment in an online lender. Mr. Ross, who is on bail awaiting trial next year, has pleaded not guilty to 10 counts of wire fraud. His lawyer didn’t respond to requests for comment.


Deloitte’s auditors repeatedly accepted Direct Lending’s assurances at face value, rather than testing the evidence, a filing by a court-appointed receiver said. Deloitte’s “improper clean audit opinions” for the funds for 2016 and 2017 helped prolong the alleged fraud, increasing investors’ losses, the filing added.

Deloitte didn’t admit any liability in agreeing to the $31 million settlement of the investors’ and receiver’s claims. The settlement is awaiting court approval. The firm said that its audits conformed to the relevant accounting rules and didn’t breach its professional standards of care, according to a filing by the receiver. A spokesman for Deloitte declined to comment.

—Lisa Schwartz contributed to this article.

Write to Jean Eaglesham at [email protected] and Coulter Jones at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 14, 2021, print edition as 'Oversight Is Weak of Private-Firm Auditing.'

"Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors."

So they're jerking each other off and the whole thing is a farce? Nice. Good to see the exemplary private sector leading the way...

Well it’s a required item that businesses don’t want to pay for and on the larger side they just rotate every five years or so amongst a handful of firms so there’s no desire for accountability. External audits are just cya or at least that’s how their viewed. A cost not a value add. One of my lines of business is similar except not codified as required but banks will more likely get slapped with MOUs and C&Ds (negative reports with tangible consequences like limiting certain activities) if you mess up and don’t have one. So it becomes a commodity service driving pricing to the lowest common denominator. (Race to the bottom) the accounting industry perhaps has the most extreme example of a organizational pyramid, up or out, juniors do all the audit work mostly kids in their early mid 20s using tight rule sets. The business is hyper optimized on billing and capacity utilization of the kids (ibanks don’t measure these things at all because you just work all the time as an analyst and it’s not linear) from what I’ve seen in some in the 7-20 largest firms ranking is over optimization.

But basically when we talk about private sector the audits are a regulatory requirement and the clients don’t hold them accountable beyond not restating earnings or getting sued (which can happen anyways) I can’t say it’s driven organically by the private sector. The industry is a rent seeking friction, like corporate finance.

FINRA, which gives out series 7 securities licenses, is also a SRO.

[PizzaSnake]

Now this is interesting. I had some dealings indirectly with Direct Lending (DLIF) as they had backed a FinTech consumer lender years ago I worked with. The recapitalization was messy because their fund was already in receivership so just to pay them off/buy them out was a nightmare. It’s not just private credit, side pocket direct equity investments in businesses, real estate, viatical settlement assets, timber, water, etc. Valuations can have a truck driven through them.

Weak Oversight Plagues Audits of Billions in Private Assets
Self-regulatory audit system fails to safeguard charities, pension funds and private companies, a WSJ analysis finds

Big Four accounting firm Deloitte agreed to pay $31 million earlier this year to resolve claims of negligence after its auditors failed to detect an alleged fraud.
PHOTO: BENJAMIN GIRETTE/BLOOMBERG NEWS
By Jean Eaglesham and Coulter Jones
Updated Aug. 13, 2021 12:17 pm ET

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TEXT
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Length 9 minutes

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Six months before Los Angeles-based Shepherd University collapsed into bankruptcy in 2017, accounting firm BW CPA Group Inc. gave the school’s finances a clean bill of health.

State regulators called the audit “grossly deficient,” saying it missed red flags for potential fraud and left numerous errors in the financial statements uncorrected. The year before, BW CPA Group failed its second every-three-year peer review in a row, state regulators said.

Until regulators took disciplinary action in 2019, there was no way for the public to know that a fellow auditing firm twice took the rare step of giving a failing grade to BW CPA. The firm was banned from auditing last year.


Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors.

Of the firms that disclosed their results, 91% got the highest “pass” grade and only 4% the worst “fail” score on the three-grade scale, the analysis found. None of the biggest 100 firms failed, and 99% of them got the top “pass” score, according to the analysis.

Research by the government and data from the auditing industry trade group show significant flaws in audits of private organizations, particularly those done by smaller firms.

This self-policing system covers the vast majority of U.S. audits, including more than 5 million private companies, some with billions in revenue, Labor Department data show. It also affects tens of thousands of pension funds, endowments, local governments, charities and billions in government grants, according to the auditing industry trade group. Investors in these companies, pensioners, donors to charities and local taxpayers are among those who could lose if auditors fail to detect problems.

BW CPA Group didn’t respond to requests for comment. A lawyer representing Shepherd University declined to comment. A spokesman for the state regulator, the California Board of Accountancy, declined to comment on the yearslong delay in taking disciplinary action.

The entire auditing industry used to police itself but that ended after the accounting scandals of the early 2000s. Firms’ audits of public companies are now overseen by a government-appointed regulator.

But there were no changes to the rules that govern the audits of private entities. “It’s a big hole,” said Steven Thomas, a Venice, Calif.-based attorney who specializes in litigation against big accounting firms. “Having audits which can involve billions and billions of dollars only being regulated by the profession is insufficient to ensure the auditors are doing their job.”

A significant number of the audits covered by self-regulation are flawed, industry data suggests. More than one in four audits reviewed last year fell short of professional standards, according to the American Institute of Certified Public Accountants. The AICPA said it was “likely that [recently introduced] highly complex accounting standards” contributed to this high failure rate.

Pension Peril
Most firms auditing employee-benefit plans do only a few per year.
Most firms auditing employee-benefit plans do only a few per year.
Source: Labor Department
AUDITS PERFORMED
1 - 5
6 - 24
25 - 99
100+
0
500
1000
1500
2000
2500
3000
3500
Federal studies put the failure rates much higher for some types of audit. More than a third of a sample of audits of pension and other employee-benefit plans were found to have major deficiencies in a 2015 Labor Department report, for example. For firms doing fewer than 25 of these audits a year, more than two-thirds of audits were substandard, the study found. A department spokesman said its continuing enforcement work “continues to identify audit quality problems.”

The flawed audits potentially affect the savings of millions of people. More than 200,000 employee-benefit plans, with $449 billion in total assets, are audited by firms that do fewer than 25 such audits a year, a Journal review of data for plans in 2018 found.


The accounting industry says things have changed since the accounting scandals involving Enron Corp. and WorldCom Inc. in the early 2000s. The AICPA, which oversees the profession’s self-regulation, said in a statement it has taken “great strides…to update its standards, educate members and help firms remediate problem areas.”

The Journal’s analysis looked at 659 firms’ assessments of each other, known as peer reviews, reported on the AICPA’s website. This sample of about 3% of the nearly 24,000 firms in the peer-review program was chosen at random by scraping the website. The AICPA declined to allow the Journal access to its full database.

Almost one in five firms didn’t disclose their peer-review results, according to the analysis. The AICPA assures its members that their results will be published only if “authorized or permitted by the firm.”

Veiled Vetting
Results of audit firms' inspections by fellow auditors
Source: WSJ analysis of AICPA data
Note: About one in five firms don't disclose the results. Percentages are for those that do.Results from a sample of 659 firms' peer review reports published by the AmericanInstitute of Certified Public Accountants.
%
Pass
Pass with deficiencies
Fail
0
10
20
30
40
50
60
70
80
90
100
The AICPA data for peer reviews of firms’ audit systems from 2018 through 2020, including ones that kept their results secret, show that 7% got fail grades and fewer than four out of five, or 79%, a pass score, with the remaining 14% getting the middle “pass with deficiencies” grade.

“It’s like the sixth grade playground—no one tells on one another,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. This lack of accountability means there is little incentive for auditors to challenge a company’s management and risk losing that client, he added.

An AICPA official said most peer reviews are publicly available “through a variety of sources.” Anyone being audited can ask the accounting firm for a copy of its peer review, the official added.

The biggest firms’ near-perfect grading is in contrast with the assessments of their audit quality by the Public Company Accounting Oversight Board, an SEC-appointed watchdog that oversees audits of public companies.


Inspections of the top 100 firms by the PCAOB rate more than a quarter of their audits, on average, as having serious deficiencies, according to the Journal’s analysis. For the biggest 20 firms, the failure rate ranged from zero to 80% in their most recent PCAOB inspection reports.

Ken Bishop is chief executive of the National Association of State Boards of Accountancy, representing boards that license accountants to practice in individual states. He said that making checks on private-company audits as thorough as the assessments of public-company ones would cause tensions within the accounting profession.

“If you make it forensic, like PCAOB firm inspections…that [could] be damaging to the firm that you’re providing the peer-review services to,” Mr. Bishop said in an interview. The two systems have different aims, he said. “The PCAOB is looking out for investors, so it’s doing a much deeper dive.”

The AICPA said the firms subject to peer review are “committed to protecting the public interest through performing quality audits.”

Investors in private entities have been harmed by weaknesses in audits. Big Four accounting firm Deloitte LLP this year agreed to pay $31 million to resolve legal claims of negligence, after its auditors failed to detect an alleged fraud in private investment funds that cost investors hundreds of millions of dollars.


Brendan Ross, at a conference in 2017, was later accused by authorities of a multiyear fraud. He has pleaded not guilty.
PHOTO: PATRICK T. FALLON/BLOOMBERG NEWS
Deloitte was the auditor for Direct Lending Investments LLC, a Glendale, Calif.-based investment firm that advised private funds with assets totaling more than $800 million. The firm’s audits don’t say they were conducted under PCAOB oversight, which would be specified if that were the case.

Authorities last year arrested Direct Lending’s owner and former Chief Executive Brendan Ross, accusing him of a multiyear fraud that involved creating fictitious borrowers to pump up the apparent value of an investment in an online lender. Mr. Ross, who is on bail awaiting trial next year, has pleaded not guilty to 10 counts of wire fraud. His lawyer didn’t respond to requests for comment.


Deloitte’s auditors repeatedly accepted Direct Lending’s assurances at face value, rather than testing the evidence, a filing by a court-appointed receiver said. Deloitte’s “improper clean audit opinions” for the funds for 2016 and 2017 helped prolong the alleged fraud, increasing investors’ losses, the filing added.

Deloitte didn’t admit any liability in agreeing to the $31 million settlement of the investors’ and receiver’s claims. The settlement is awaiting court approval. The firm said that its audits conformed to the relevant accounting rules and didn’t breach its professional standards of care, according to a filing by the receiver. A spokesman for Deloitte declined to comment.

—Lisa Schwartz contributed to this article.

Write to Jean Eaglesham at [email protected] and Coulter Jones at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 14, 2021, print edition as 'Oversight Is Weak of Private-Firm Auditing.'

"Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors."

So they're jerking each other off and the whole thing is a farce? Nice. Good to see the exemplary private sector leading the way...

Well it’s a required item that businesses don’t want to pay for and on the larger side they just rotate every five years or so amongst a handful of firms so there’s no desire for accountability. External audits are just cya or at least that’s how their viewed. A cost not a value add. One of my lines of business is similar except not codified as required but banks will more likely get slapped with MOUs and C&Ds (negative reports with tangible consequences like limiting certain activities) if you mess up and don’t have one. So it becomes a commodity service driving pricing to the lowest common denominator. (Race to the bottom) the accounting industry perhaps has the most extreme example of a organizational pyramid, up or out, juniors do all the audit work mostly kids in their early mid 20s using tight rule sets. The business is hyper optimized on billing and capacity utilization of the kids (ibanks don’t measure these things at all because you just work all the time as an analyst and it’s not linear) from what I’ve seen in some in the 7-20 largest firms ranking is over optimization.

But basically when we talk about private sector the audits are a regulatory requirement and the clients don’t hold them accountable beyond not restating earnings or getting sued (which can happen anyways) I can’t say it’s driven organically by the private sector. The industry is a rent seeking friction, like corporate finance.

FINRA, which gives out series 7 securities licenses, is also a SRO.

So it’s all commodified grift, a confidence game.

When there is a crisis of confidence it can all collapse.

Rule of law is a pretty thin layer...

That system is already fraying badly. See “revolts” in Tejas and Floriduh re masking. When the wheels fall off, meteorologically speaking, the Afghan collapse is going to look glacial in comparison.

[Farfromgeneva]

Now this is interesting. I had some dealings indirectly with Direct Lending (DLIF) as they had backed a FinTech consumer lender years ago I worked with. The recapitalization was messy because their fund was already in receivership so just to pay them off/buy them out was a nightmare. It’s not just private credit, side pocket direct equity investments in businesses, real estate, viatical settlement assets, timber, water, etc. Valuations can have a truck driven through them.

Weak Oversight Plagues Audits of Billions in Private Assets
Self-regulatory audit system fails to safeguard charities, pension funds and private companies, a WSJ analysis finds

Big Four accounting firm Deloitte agreed to pay $31 million earlier this year to resolve claims of negligence after its auditors failed to detect an alleged fraud.
PHOTO: BENJAMIN GIRETTE/BLOOMBERG NEWS
By Jean Eaglesham and Coulter Jones
Updated Aug. 13, 2021 12:17 pm ET

SAVE

SHARE

TEXT
88

Listen to article
Length 9 minutes

Queue
Six months before Los Angeles-based Shepherd University collapsed into bankruptcy in 2017, accounting firm BW CPA Group Inc. gave the school’s finances a clean bill of health.

State regulators called the audit “grossly deficient,” saying it missed red flags for potential fraud and left numerous errors in the financial statements uncorrected. The year before, BW CPA Group failed its second every-three-year peer review in a row, state regulators said.

Until regulators took disciplinary action in 2019, there was no way for the public to know that a fellow auditing firm twice took the rare step of giving a failing grade to BW CPA. The firm was banned from auditing last year.


Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors.

Of the firms that disclosed their results, 91% got the highest “pass” grade and only 4% the worst “fail” score on the three-grade scale, the analysis found. None of the biggest 100 firms failed, and 99% of them got the top “pass” score, according to the analysis.

Research by the government and data from the auditing industry trade group show significant flaws in audits of private organizations, particularly those done by smaller firms.

This self-policing system covers the vast majority of U.S. audits, including more than 5 million private companies, some with billions in revenue, Labor Department data show. It also affects tens of thousands of pension funds, endowments, local governments, charities and billions in government grants, according to the auditing industry trade group. Investors in these companies, pensioners, donors to charities and local taxpayers are among those who could lose if auditors fail to detect problems.

BW CPA Group didn’t respond to requests for comment. A lawyer representing Shepherd University declined to comment. A spokesman for the state regulator, the California Board of Accountancy, declined to comment on the yearslong delay in taking disciplinary action.

The entire auditing industry used to police itself but that ended after the accounting scandals of the early 2000s. Firms’ audits of public companies are now overseen by a government-appointed regulator.

But there were no changes to the rules that govern the audits of private entities. “It’s a big hole,” said Steven Thomas, a Venice, Calif.-based attorney who specializes in litigation against big accounting firms. “Having audits which can involve billions and billions of dollars only being regulated by the profession is insufficient to ensure the auditors are doing their job.”

A significant number of the audits covered by self-regulation are flawed, industry data suggests. More than one in four audits reviewed last year fell short of professional standards, according to the American Institute of Certified Public Accountants. The AICPA said it was “likely that [recently introduced] highly complex accounting standards” contributed to this high failure rate.

Pension Peril
Most firms auditing employee-benefit plans do only a few per year.
Most firms auditing employee-benefit plans do only a few per year.
Source: Labor Department
AUDITS PERFORMED
1 - 5
6 - 24
25 - 99
100+
0
500
1000
1500
2000
2500
3000
3500
Federal studies put the failure rates much higher for some types of audit. More than a third of a sample of audits of pension and other employee-benefit plans were found to have major deficiencies in a 2015 Labor Department report, for example. For firms doing fewer than 25 of these audits a year, more than two-thirds of audits were substandard, the study found. A department spokesman said its continuing enforcement work “continues to identify audit quality problems.”

The flawed audits potentially affect the savings of millions of people. More than 200,000 employee-benefit plans, with $449 billion in total assets, are audited by firms that do fewer than 25 such audits a year, a Journal review of data for plans in 2018 found.


The accounting industry says things have changed since the accounting scandals involving Enron Corp. and WorldCom Inc. in the early 2000s. The AICPA, which oversees the profession’s self-regulation, said in a statement it has taken “great strides…to update its standards, educate members and help firms remediate problem areas.”

The Journal’s analysis looked at 659 firms’ assessments of each other, known as peer reviews, reported on the AICPA’s website. This sample of about 3% of the nearly 24,000 firms in the peer-review program was chosen at random by scraping the website. The AICPA declined to allow the Journal access to its full database.

Almost one in five firms didn’t disclose their peer-review results, according to the analysis. The AICPA assures its members that their results will be published only if “authorized or permitted by the firm.”

Veiled Vetting
Results of audit firms' inspections by fellow auditors
Source: WSJ analysis of AICPA data
Note: About one in five firms don't disclose the results. Percentages are for those that do.Results from a sample of 659 firms' peer review reports published by the AmericanInstitute of Certified Public Accountants.
%
Pass
Pass with deficiencies
Fail
0
10
20
30
40
50
60
70
80
90
100
The AICPA data for peer reviews of firms’ audit systems from 2018 through 2020, including ones that kept their results secret, show that 7% got fail grades and fewer than four out of five, or 79%, a pass score, with the remaining 14% getting the middle “pass with deficiencies” grade.

“It’s like the sixth grade playground—no one tells on one another,” said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. This lack of accountability means there is little incentive for auditors to challenge a company’s management and risk losing that client, he added.

An AICPA official said most peer reviews are publicly available “through a variety of sources.” Anyone being audited can ask the accounting firm for a copy of its peer review, the official added.

The biggest firms’ near-perfect grading is in contrast with the assessments of their audit quality by the Public Company Accounting Oversight Board, an SEC-appointed watchdog that oversees audits of public companies.


Inspections of the top 100 firms by the PCAOB rate more than a quarter of their audits, on average, as having serious deficiencies, according to the Journal’s analysis. For the biggest 20 firms, the failure rate ranged from zero to 80% in their most recent PCAOB inspection reports.

Ken Bishop is chief executive of the National Association of State Boards of Accountancy, representing boards that license accountants to practice in individual states. He said that making checks on private-company audits as thorough as the assessments of public-company ones would cause tensions within the accounting profession.

“If you make it forensic, like PCAOB firm inspections…that [could] be damaging to the firm that you’re providing the peer-review services to,” Mr. Bishop said in an interview. The two systems have different aims, he said. “The PCAOB is looking out for investors, so it’s doing a much deeper dive.”

The AICPA said the firms subject to peer review are “committed to protecting the public interest through performing quality audits.”

Investors in private entities have been harmed by weaknesses in audits. Big Four accounting firm Deloitte LLP this year agreed to pay $31 million to resolve legal claims of negligence, after its auditors failed to detect an alleged fraud in private investment funds that cost investors hundreds of millions of dollars.


Brendan Ross, at a conference in 2017, was later accused by authorities of a multiyear fraud. He has pleaded not guilty.
PHOTO: PATRICK T. FALLON/BLOOMBERG NEWS
Deloitte was the auditor for Direct Lending Investments LLC, a Glendale, Calif.-based investment firm that advised private funds with assets totaling more than $800 million. The firm’s audits don’t say they were conducted under PCAOB oversight, which would be specified if that were the case.

Authorities last year arrested Direct Lending’s owner and former Chief Executive Brendan Ross, accusing him of a multiyear fraud that involved creating fictitious borrowers to pump up the apparent value of an investment in an online lender. Mr. Ross, who is on bail awaiting trial next year, has pleaded not guilty to 10 counts of wire fraud. His lawyer didn’t respond to requests for comment.


Deloitte’s auditors repeatedly accepted Direct Lending’s assurances at face value, rather than testing the evidence, a filing by a court-appointed receiver said. Deloitte’s “improper clean audit opinions” for the funds for 2016 and 2017 helped prolong the alleged fraud, increasing investors’ losses, the filing added.

Deloitte didn’t admit any liability in agreeing to the $31 million settlement of the investors’ and receiver’s claims. The settlement is awaiting court approval. The firm said that its audits conformed to the relevant accounting rules and didn’t breach its professional standards of care, according to a filing by the receiver. A spokesman for Deloitte declined to comment.

—Lisa Schwartz contributed to this article.

Write to Jean Eaglesham at [email protected] and Coulter Jones at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 14, 2021, print edition as 'Oversight Is Weak of Private-Firm Auditing.'

"Firms that audit private entities essentially police each other, often with no public disclosure. A Wall Street Journal analysis of the system shows that auditors give top grades to one another, hardly ever find fault with the biggest accounting firms and often don’t disclose failures among smaller auditors."

So they're jerking each other off and the whole thing is a farce? Nice. Good to see the exemplary private sector leading the way...

Well it’s a required item that businesses don’t want to pay for and on the larger side they just rotate every five years or so amongst a handful of firms so there’s no desire for accountability. External audits are just cya or at least that’s how their viewed. A cost not a value add. One of my lines of business is similar except not codified as required but banks will more likely get slapped with MOUs and C&Ds (negative reports with tangible consequences like limiting certain activities) if you mess up and don’t have one. So it becomes a commodity service driving pricing to the lowest common denominator. (Race to the bottom) the accounting industry perhaps has the most extreme example of a organizational pyramid, up or out, juniors do all the audit work mostly kids in their early mid 20s using tight rule sets. The business is hyper optimized on billing and capacity utilization of the kids (ibanks don’t measure these things at all because you just work all the time as an analyst and it’s not linear) from what I’ve seen in some in the 7-20 largest firms ranking is over optimization.

But basically when we talk about private sector the audits are a regulatory requirement and the clients don’t hold them accountable beyond not restating earnings or getting sued (which can happen anyways) I can’t say it’s driven organically by the private sector. The industry is a rent seeking friction, like corporate finance.

FINRA, which gives out series 7 securities licenses, is also a SRO.

So it’s all commodified grift, a confidence game.

When there is a crisis of confidence it can all collapse.

Rule of law is a pretty thin layer...

That system is already fraying badly. See “revolts” in Tejas and Floriduh re masking. When the wheels fall off, meteorologically speaking, the Afghan collapse is going to look glacial in comparison.

Pull out a dollar bill, look at it back and forth and tell me what supports its value other than confidence in our system. My biggest problem w Trump aside from the moral and policy disaster he is was his destruction of confidence for solely his own personal gain attacking the very heart of our entire system. The property rights, transparency and infrastructure unlike any other country which is why they all hold dollars instead of Rubles, Rupees or Renimni let alone Euros or pound Sterling as rainy day reserves.

[Farfromgeneva]

Is the heavy position in short term debt an issue?

https://www.bloomberg.com/news/articles ... nd=premium

Today’s WSJ (a standard US equities hedge is owning the “long bond”, 30yr US treasury bond). This also might support Brooklyn’s higher wage would pass through to higher “real” wages bs simply get eaten up by inflation though inflation is localized and not distributed evenly across goods and services.

Something Is Awry in the Treasury Market This Summer
Bond yields fell too far, then came back too strong; a real yield of minus 1.2% is hard to understand

The market in August has again started anticipating economic expansion, with a rise in Treasury yields. The Treasury Department building in Washington.
PHOTO: STEFANI REYNOLDS/BLOOMBERG NEWS
James Mackintosh
Updated Aug. 15, 2021 9:52 am ET

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Length 5 minutes

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I get uncomfortable when I can’t understand what’s going on in the markets, and I’m not really happy with my explanation for the weirdness of the Treasury market over the past few months. Given that pretty much everything else rests on Treasurys behaving sensibly, my level of discomfort is high.

The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.



Value, Growth, Whatever
Stocks switched from being led by cheap "value" recovery plays to being ledby Big Tech growth, but kept setting records.
Change this year in Russell 1000 indexes
Source: FactSet
%
Value
Growth
2021
Aug.
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
The market response from March to the start of this month can be thought of as pricing in a repeat of the secular stagnation brought on by the 2008 financial crisis, with the twist of slightly higher inflation than in the past decade.

Pramod Atluri, a fixed-income portfolio manager at Capital Group, says this is akin to “too much debt and too much money in the system.”

That means low bond yields, as debt holds back the economy and the Fed is unable to raise rates much. It means corporate bonds do fine, because there is so much money chasing safe returns that even fairly risky companies can refinance. And it is great for stocks, as the past decade shows, especially those able to offer reliable growth in a weak economy—broadly, Big Tech.

Junk Bond Investors Show Little Fear
Worries about the Delta variant and falling Treasury yields had only a littleimpact on risky corporate bonds.
U.S. junk bonds spread* over Treasury yield
Source: Ice Data Indices via St. Louis Fed
*Option-adjusted spread on ICE BofA US High Yield
percentage points
RECESSION
2020
'21
2
3
4
5
6
7
8
9
10
11
12
Yet, Treasury yields still seem to have fallen much too far from March to July, before an inexplicably large bounce.

“It is a conundrum,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “The scale [of the moves in yields] seems at odds with the degree of concerns.”

This month the market’s again started anticipating economic expansion, with a rise in Treasury yields, stable junk-bond spreads and a swing back from Big Tech and other growth stocks to economically sensitive cyclicals, especially banks and industrials.

Once again, though, the size of moves still seems extreme. Mr. Atluri says it is possible that with so much money sloshing around, the levels of markets carry less information than their direction; so Treasury yields rise or fall on good and bad news as normal, but sometimes go much further than they would have in the past.

Markets also have been struggling to come to grips with the spread of the Delta variant of Covid-19. The variant’s spread in the U.K. coincided with the fall in bond yields, while the switch to rising yields coincided with an improvement in the U.K.’s hospital admissions, as quantitative strategist Andrew Lapthorne at Société Générale points out. Again, though, it is deeply strange that stocks should reach new highs both when bond yields were falling (and stocks were driven by Big Tech) and when bond yields were rising (and stocks were led by cyclicals).

Top TIPS
Real yields hit their lowest on record at the start of August.
10-year Treasury inflation-protected securities yield
Source: Federal Reserve Bank of St. Louis
%
RECESSION
2007
'10
'15
'20
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history. It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold—which usually rises when TIPS yields fall—and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

We can square the circle by dismissing the signal from TIPS. It is never satisfactory to think the market just wasn’t working, but TIPS yields seem to have fallen dramatically more than they should, which I can just about believe for a market that is anyway fairly illiquid when traders have decamped to the beach. It is even easier to believe given the rebound of the past two weeks, which has brought yields back up to a more reasonable level, albeit still deeply negative, on the back of some signs of economic strength.


Perhaps July was just a summer anomaly. But with the wild excesses of meme stocks, clean energy, electric cars and SPACs still fresh in the memory, I’m not confident that the return of normal market relationships will last.

Write to James Mackintosh at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 16, 2021, print edition as 'Something Weird Is Going On in the Treasury Market.'

[PizzaSnake]

Is the heavy position in short term debt an issue?

https://www.bloomberg.com/news/articles ... nd=premium

Today’s WSJ (a standard US equities hedge is owning the “long bond”, 30yr US treasury bond). This also might support Brooklyn’s higher wage would pass through to higher “real” wages bs simply get eaten up by inflation though inflation is localized and not distributed evenly across goods and services.

Something Is Awry in the Treasury Market This Summer
Bond yields fell too far, then came back too strong; a real yield of minus 1.2% is hard to understand

The market in August has again started anticipating economic expansion, with a rise in Treasury yields. The Treasury Department building in Washington.
PHOTO: STEFANI REYNOLDS/BLOOMBERG NEWS
James Mackintosh
Updated Aug. 15, 2021 9:52 am ET

SAVE

SHARE

TEXT

Listen to article
Length 5 minutes

Queue
I get uncomfortable when I can’t understand what’s going on in the markets, and I’m not really happy with my explanation for the weirdness of the Treasury market over the past few months. Given that pretty much everything else rests on Treasurys behaving sensibly, my level of discomfort is high.

The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.



Value, Growth, Whatever
Stocks switched from being led by cheap "value" recovery plays to being ledby Big Tech growth, but kept setting records.
Change this year in Russell 1000 indexes
Source: FactSet
%
Value
Growth
2021
Aug.
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
The market response from March to the start of this month can be thought of as pricing in a repeat of the secular stagnation brought on by the 2008 financial crisis, with the twist of slightly higher inflation than in the past decade.

Pramod Atluri, a fixed-income portfolio manager at Capital Group, says this is akin to “too much debt and too much money in the system.”

That means low bond yields, as debt holds back the economy and the Fed is unable to raise rates much. It means corporate bonds do fine, because there is so much money chasing safe returns that even fairly risky companies can refinance. And it is great for stocks, as the past decade shows, especially those able to offer reliable growth in a weak economy—broadly, Big Tech.

Junk Bond Investors Show Little Fear
Worries about the Delta variant and falling Treasury yields had only a littleimpact on risky corporate bonds.
U.S. junk bonds spread* over Treasury yield
Source: Ice Data Indices via St. Louis Fed
*Option-adjusted spread on ICE BofA US High Yield
percentage points
RECESSION
2020
'21
2
3
4
5
6
7
8
9
10
11
12
Yet, Treasury yields still seem to have fallen much too far from March to July, before an inexplicably large bounce.

“It is a conundrum,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “The scale [of the moves in yields] seems at odds with the degree of concerns.”

This month the market’s again started anticipating economic expansion, with a rise in Treasury yields, stable junk-bond spreads and a swing back from Big Tech and other growth stocks to economically sensitive cyclicals, especially banks and industrials.

Once again, though, the size of moves still seems extreme. Mr. Atluri says it is possible that with so much money sloshing around, the levels of markets carry less information than their direction; so Treasury yields rise or fall on good and bad news as normal, but sometimes go much further than they would have in the past.

Markets also have been struggling to come to grips with the spread of the Delta variant of Covid-19. The variant’s spread in the U.K. coincided with the fall in bond yields, while the switch to rising yields coincided with an improvement in the U.K.’s hospital admissions, as quantitative strategist Andrew Lapthorne at Société Générale points out. Again, though, it is deeply strange that stocks should reach new highs both when bond yields were falling (and stocks were driven by Big Tech) and when bond yields were rising (and stocks were led by cyclicals).

Top TIPS
Real yields hit their lowest on record at the start of August.
10-year Treasury inflation-protected securities yield
Source: Federal Reserve Bank of St. Louis
%
RECESSION
2007
'10
'15
'20
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history. It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold—which usually rises when TIPS yields fall—and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

We can square the circle by dismissing the signal from TIPS. It is never satisfactory to think the market just wasn’t working, but TIPS yields seem to have fallen dramatically more than they should, which I can just about believe for a market that is anyway fairly illiquid when traders have decamped to the beach. It is even easier to believe given the rebound of the past two weeks, which has brought yields back up to a more reasonable level, albeit still deeply negative, on the back of some signs of economic strength.


Perhaps July was just a summer anomaly. But with the wild excesses of meme stocks, clean energy, electric cars and SPACs still fresh in the memory, I’m not confident that the return of normal market relationships will last.

Write to James Mackintosh at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 16, 2021, print edition as 'Something Weird Is Going On in the Treasury Market.'

Fiscal "climate change"? Just as old meteorological models fail, maybe the fiscal ones will too? What could be more panic-inducing than the world at large not following centuries-old norms?

[Farfromgeneva]

Is the heavy position in short term debt an issue?

https://www.bloomberg.com/news/articles ... nd=premium

Today’s WSJ (a standard US equities hedge is owning the “long bond”, 30yr US treasury bond). This also might support Brooklyn’s higher wage would pass through to higher “real” wages bs simply get eaten up by inflation though inflation is localized and not distributed evenly across goods and services.

Something Is Awry in the Treasury Market This Summer
Bond yields fell too far, then came back too strong; a real yield of minus 1.2% is hard to understand

The market in August has again started anticipating economic expansion, with a rise in Treasury yields. The Treasury Department building in Washington.
PHOTO: STEFANI REYNOLDS/BLOOMBERG NEWS
James Mackintosh
Updated Aug. 15, 2021 9:52 am ET

SAVE

SHARE

TEXT

Listen to article
Length 5 minutes

Queue
I get uncomfortable when I can’t understand what’s going on in the markets, and I’m not really happy with my explanation for the weirdness of the Treasury market over the past few months. Given that pretty much everything else rests on Treasurys behaving sensibly, my level of discomfort is high.

The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.



Value, Growth, Whatever
Stocks switched from being led by cheap "value" recovery plays to being ledby Big Tech growth, but kept setting records.
Change this year in Russell 1000 indexes
Source: FactSet
%
Value
Growth
2021
Aug.
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
The market response from March to the start of this month can be thought of as pricing in a repeat of the secular stagnation brought on by the 2008 financial crisis, with the twist of slightly higher inflation than in the past decade.

Pramod Atluri, a fixed-income portfolio manager at Capital Group, says this is akin to “too much debt and too much money in the system.”

That means low bond yields, as debt holds back the economy and the Fed is unable to raise rates much. It means corporate bonds do fine, because there is so much money chasing safe returns that even fairly risky companies can refinance. And it is great for stocks, as the past decade shows, especially those able to offer reliable growth in a weak economy—broadly, Big Tech.

Junk Bond Investors Show Little Fear
Worries about the Delta variant and falling Treasury yields had only a littleimpact on risky corporate bonds.
U.S. junk bonds spread* over Treasury yield
Source: Ice Data Indices via St. Louis Fed
*Option-adjusted spread on ICE BofA US High Yield
percentage points
RECESSION
2020
'21
2
3
4
5
6
7
8
9
10
11
12
Yet, Treasury yields still seem to have fallen much too far from March to July, before an inexplicably large bounce.

“It is a conundrum,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “The scale [of the moves in yields] seems at odds with the degree of concerns.”

This month the market’s again started anticipating economic expansion, with a rise in Treasury yields, stable junk-bond spreads and a swing back from Big Tech and other growth stocks to economically sensitive cyclicals, especially banks and industrials.

Once again, though, the size of moves still seems extreme. Mr. Atluri says it is possible that with so much money sloshing around, the levels of markets carry less information than their direction; so Treasury yields rise or fall on good and bad news as normal, but sometimes go much further than they would have in the past.

Markets also have been struggling to come to grips with the spread of the Delta variant of Covid-19. The variant’s spread in the U.K. coincided with the fall in bond yields, while the switch to rising yields coincided with an improvement in the U.K.’s hospital admissions, as quantitative strategist Andrew Lapthorne at Société Générale points out. Again, though, it is deeply strange that stocks should reach new highs both when bond yields were falling (and stocks were driven by Big Tech) and when bond yields were rising (and stocks were led by cyclicals).

Top TIPS
Real yields hit their lowest on record at the start of August.
10-year Treasury inflation-protected securities yield
Source: Federal Reserve Bank of St. Louis
%
RECESSION
2007
'10
'15
'20
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history. It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold—which usually rises when TIPS yields fall—and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

We can square the circle by dismissing the signal from TIPS. It is never satisfactory to think the market just wasn’t working, but TIPS yields seem to have fallen dramatically more than they should, which I can just about believe for a market that is anyway fairly illiquid when traders have decamped to the beach. It is even easier to believe given the rebound of the past two weeks, which has brought yields back up to a more reasonable level, albeit still deeply negative, on the back of some signs of economic strength.


Perhaps July was just a summer anomaly. But with the wild excesses of meme stocks, clean energy, electric cars and SPACs still fresh in the memory, I’m not confident that the return of normal market relationships will last.

Write to James Mackintosh at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 16, 2021, print edition as 'Something Weird Is Going On in the Treasury Market.'

Fiscal "climate change"? Just as old meteorological models fail, maybe the fiscal ones will too? What could be more panic-inducing than the world at large not following centuries-old norms?

Well I can say the capital markets side and the asset management side (finance has all these disciplines within as you’d guess if you aren’t familiar) tend to follow axioms that they believe to be “rules” which work until they don’t. For a 4-5yrs stretch from like 12/13-18/19 the belief was there was a 150bps or so spread between German long dated Bunds and US 10yr treasury. Then it broke down. So yes rules are treated as sacrosanct until they aren’t.

This being said, typically over time you would not see bond yields going down (inversely bond prices up) and equities prices up as equities are considered risk assets and bonds are risk averse assets (generally, lot of derivative or structured bonds that have equity like characteristics but they’re paying 5%+, used to be 8-14%). We’ve never really seen this hold over a extended period of time, including now because we’re looking at more or like a month of this behavior. But if it persists its a signal of something off in the system which I agree with then is too much money in the system.

Also noted how corporate cash holdings is at an all time high. Including a year ago in the heart of the pandemic. So all this money out Fed and other center banks have let loose isn’t being invested certainly not long term investments. If the money isn’t being utilized the way the central banks expect it to be then they should pull it back in-starting with us. If we’re not getting the expected benefit but the risks (inflation & more importantly zombie companies hang on longer because some private creditor will refinance a few times at higher rates and more dilutive terms until all the equity is wiped out and the cost or damage from the ultimate failure is higher and more severe-think markets do allow for more efficient corporate mercy killings)

[PizzaSnake]

Is the heavy position in short term debt an issue?

https://www.bloomberg.com/news/articles ... nd=premium

Today’s WSJ (a standard US equities hedge is owning the “long bond”, 30yr US treasury bond). This also might support Brooklyn’s higher wage would pass through to higher “real” wages bs simply get eaten up by inflation though inflation is localized and not distributed evenly across goods and services.

Something Is Awry in the Treasury Market This Summer
Bond yields fell too far, then came back too strong; a real yield of minus 1.2% is hard to understand

The market in August has again started anticipating economic expansion, with a rise in Treasury yields. The Treasury Department building in Washington.
PHOTO: STEFANI REYNOLDS/BLOOMBERG NEWS
James Mackintosh
Updated Aug. 15, 2021 9:52 am ET

SAVE

SHARE

TEXT

Listen to article
Length 5 minutes

Queue
I get uncomfortable when I can’t understand what’s going on in the markets, and I’m not really happy with my explanation for the weirdness of the Treasury market over the past few months. Given that pretty much everything else rests on Treasurys behaving sensibly, my level of discomfort is high.

The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.



Value, Growth, Whatever
Stocks switched from being led by cheap "value" recovery plays to being ledby Big Tech growth, but kept setting records.
Change this year in Russell 1000 indexes
Source: FactSet
%
Value
Growth
2021
Aug.
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
The market response from March to the start of this month can be thought of as pricing in a repeat of the secular stagnation brought on by the 2008 financial crisis, with the twist of slightly higher inflation than in the past decade.

Pramod Atluri, a fixed-income portfolio manager at Capital Group, says this is akin to “too much debt and too much money in the system.”

That means low bond yields, as debt holds back the economy and the Fed is unable to raise rates much. It means corporate bonds do fine, because there is so much money chasing safe returns that even fairly risky companies can refinance. And it is great for stocks, as the past decade shows, especially those able to offer reliable growth in a weak economy—broadly, Big Tech.

Junk Bond Investors Show Little Fear
Worries about the Delta variant and falling Treasury yields had only a littleimpact on risky corporate bonds.
U.S. junk bonds spread* over Treasury yield
Source: Ice Data Indices via St. Louis Fed
*Option-adjusted spread on ICE BofA US High Yield
percentage points
RECESSION
2020
'21
2
3
4
5
6
7
8
9
10
11
12
Yet, Treasury yields still seem to have fallen much too far from March to July, before an inexplicably large bounce.

“It is a conundrum,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “The scale [of the moves in yields] seems at odds with the degree of concerns.”

This month the market’s again started anticipating economic expansion, with a rise in Treasury yields, stable junk-bond spreads and a swing back from Big Tech and other growth stocks to economically sensitive cyclicals, especially banks and industrials.

Once again, though, the size of moves still seems extreme. Mr. Atluri says it is possible that with so much money sloshing around, the levels of markets carry less information than their direction; so Treasury yields rise or fall on good and bad news as normal, but sometimes go much further than they would have in the past.

Markets also have been struggling to come to grips with the spread of the Delta variant of Covid-19. The variant’s spread in the U.K. coincided with the fall in bond yields, while the switch to rising yields coincided with an improvement in the U.K.’s hospital admissions, as quantitative strategist Andrew Lapthorne at Société Générale points out. Again, though, it is deeply strange that stocks should reach new highs both when bond yields were falling (and stocks were driven by Big Tech) and when bond yields were rising (and stocks were led by cyclicals).

Top TIPS
Real yields hit their lowest on record at the start of August.
10-year Treasury inflation-protected securities yield
Source: Federal Reserve Bank of St. Louis
%
RECESSION
2007
'10
'15
'20
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history. It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold—which usually rises when TIPS yields fall—and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

We can square the circle by dismissing the signal from TIPS. It is never satisfactory to think the market just wasn’t working, but TIPS yields seem to have fallen dramatically more than they should, which I can just about believe for a market that is anyway fairly illiquid when traders have decamped to the beach. It is even easier to believe given the rebound of the past two weeks, which has brought yields back up to a more reasonable level, albeit still deeply negative, on the back of some signs of economic strength.


Perhaps July was just a summer anomaly. But with the wild excesses of meme stocks, clean energy, electric cars and SPACs still fresh in the memory, I’m not confident that the return of normal market relationships will last.

Write to James Mackintosh at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 16, 2021, print edition as 'Something Weird Is Going On in the Treasury Market.'

Fiscal "climate change"? Just as old meteorological models fail, maybe the fiscal ones will too? What could be more panic-inducing than the world at large not following centuries-old norms?

Well I can say the capital markets side and the asset management side (finance has all these disciplines within as you’d guess if you aren’t familiar) tend to follow axioms that they believe to be “rules” which work until they don’t. For a 4-5yrs stretch from like 12/13-18/19 the belief was there was a 150bps or so spread between German long dated Bunds and US 10yr treasury. Then it broke down. So yes rules are treated as sacrosanct until they aren’t.

This being said, typically over time you would not see bond yields going down (inversely bond prices up) and equities prices up as equities are considered risk assets and bonds are risk averse assets (generally, lot of derivative or structured bonds that have equity like characteristics but they’re paying 5%+, used to be 8-14%). We’ve never really seen this hold over a extended period of time, including now because we’re looking at more or like a month of this behavior. But if it persists its a signal of something off in the system which I agree with then is too much money in the system.

Also noted how corporate cash holdings is at an all time high. Including a year ago in the heart of the pandemic. So all this money out Fed and other center banks have let loose isn’t being invested certainly not long term investments. If the money isn’t being utilized the way the central banks expect it to be then they should pull it back in-starting with us. If we’re not getting the expected benefit but the risks (inflation & more importantly zombie companies hang on longer because some private creditor will refinance a few times at higher rates and more dilutive terms until all the equity is wiped out and the cost or damage from the ultimate failure is higher and more severe-think markets do allow for more efficient corporate mercy killings)

Return of capital via stock repurchase has what effect? Where does that money go once returned to investors? Chasing declining returns in bond market? Forced into "frothy" equities?

Why no long-term investment by corporations? No one knows what is going to happen with climate change so long-term commitments verboten? Paralysis by analysis?

[MDlaxfan76]

Can this conversation continue without copying the entire thread each time, guys?

Maybe just copy the last two or three exchanges each time?

[Farfromgeneva]

Is the heavy position in short term debt an issue?

https://www.bloomberg.com/news/articles ... nd=premium

Today’s WSJ (a standard US equities hedge is owning the “long bond”, 30yr US treasury bond). This also might support Brooklyn’s higher wage would pass through to higher “real” wages bs simply get eaten up by inflation though inflation is localized and not distributed evenly across goods and services.

Something Is Awry in the Treasury Market This Summer
Bond yields fell too far, then came back too strong; a real yield of minus 1.2% is hard to understand

The market in August has again started anticipating economic expansion, with a rise in Treasury yields. The Treasury Department building in Washington.
PHOTO: STEFANI REYNOLDS/BLOOMBERG NEWS
James Mackintosh
Updated Aug. 15, 2021 9:52 am ET

SAVE

SHARE

TEXT

Listen to article
Length 5 minutes

Queue
I get uncomfortable when I can’t understand what’s going on in the markets, and I’m not really happy with my explanation for the weirdness of the Treasury market over the past few months. Given that pretty much everything else rests on Treasurys behaving sensibly, my level of discomfort is high.

The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.



Value, Growth, Whatever
Stocks switched from being led by cheap "value" recovery plays to being ledby Big Tech growth, but kept setting records.
Change this year in Russell 1000 indexes
Source: FactSet
%
Value
Growth
2021
Aug.
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
The market response from March to the start of this month can be thought of as pricing in a repeat of the secular stagnation brought on by the 2008 financial crisis, with the twist of slightly higher inflation than in the past decade.

Pramod Atluri, a fixed-income portfolio manager at Capital Group, says this is akin to “too much debt and too much money in the system.”

That means low bond yields, as debt holds back the economy and the Fed is unable to raise rates much. It means corporate bonds do fine, because there is so much money chasing safe returns that even fairly risky companies can refinance. And it is great for stocks, as the past decade shows, especially those able to offer reliable growth in a weak economy—broadly, Big Tech.

Junk Bond Investors Show Little Fear
Worries about the Delta variant and falling Treasury yields had only a littleimpact on risky corporate bonds.
U.S. junk bonds spread* over Treasury yield
Source: Ice Data Indices via St. Louis Fed
*Option-adjusted spread on ICE BofA US High Yield
percentage points
RECESSION
2020
'21
2
3
4
5
6
7
8
9
10
11
12
Yet, Treasury yields still seem to have fallen much too far from March to July, before an inexplicably large bounce.

“It is a conundrum,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs. “The scale [of the moves in yields] seems at odds with the degree of concerns.”

This month the market’s again started anticipating economic expansion, with a rise in Treasury yields, stable junk-bond spreads and a swing back from Big Tech and other growth stocks to economically sensitive cyclicals, especially banks and industrials.

Once again, though, the size of moves still seems extreme. Mr. Atluri says it is possible that with so much money sloshing around, the levels of markets carry less information than their direction; so Treasury yields rise or fall on good and bad news as normal, but sometimes go much further than they would have in the past.

Markets also have been struggling to come to grips with the spread of the Delta variant of Covid-19. The variant’s spread in the U.K. coincided with the fall in bond yields, while the switch to rising yields coincided with an improvement in the U.K.’s hospital admissions, as quantitative strategist Andrew Lapthorne at Société Générale points out. Again, though, it is deeply strange that stocks should reach new highs both when bond yields were falling (and stocks were driven by Big Tech) and when bond yields were rising (and stocks were led by cyclicals).

Top TIPS
Real yields hit their lowest on record at the start of August.
10-year Treasury inflation-protected securities yield
Source: Federal Reserve Bank of St. Louis
%
RECESSION
2007
'10
'15
'20
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history. It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold—which usually rises when TIPS yields fall—and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

We can square the circle by dismissing the signal from TIPS. It is never satisfactory to think the market just wasn’t working, but TIPS yields seem to have fallen dramatically more than they should, which I can just about believe for a market that is anyway fairly illiquid when traders have decamped to the beach. It is even easier to believe given the rebound of the past two weeks, which has brought yields back up to a more reasonable level, albeit still deeply negative, on the back of some signs of economic strength.


Perhaps July was just a summer anomaly. But with the wild excesses of meme stocks, clean energy, electric cars and SPACs still fresh in the memory, I’m not confident that the return of normal market relationships will last.

Write to James Mackintosh at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the August 16, 2021, print edition as 'Something Weird Is Going On in the Treasury Market.'

Fiscal "climate change"? Just as old meteorological models fail, maybe the fiscal ones will too? What could be more panic-inducing than the world at large not following centuries-old norms?

Well I can say the capital markets side and the asset management side (finance has all these disciplines within as you’d guess if you aren’t familiar) tend to follow axioms that they believe to be “rules” which work until they don’t. For a 4-5yrs stretch from like 12/13-18/19 the belief was there was a 150bps or so spread between German long dated Bunds and US 10yr treasury. Then it broke down. So yes rules are treated as sacrosanct until they aren’t.

This being said, typically over time you would not see bond yields going down (inversely bond prices up) and equities prices up as equities are considered risk assets and bonds are risk averse assets (generally, lot of derivative or structured bonds that have equity like characteristics but they’re paying 5%+, used to be 8-14%). We’ve never really seen this hold over a extended period of time, including now because we’re looking at more or like a month of this behavior. But if it persists its a signal of something off in the system which I agree with then is too much money in the system.

Also noted how corporate cash holdings is at an all time high. Including a year ago in the heart of the pandemic. So all this money out Fed and other center banks have let loose isn’t being invested certainly not long term investments. If the money isn’t being utilized the way the central banks expect it to be then they should pull it back in-starting with us. If we’re not getting the expected benefit but the risks (inflation & more importantly zombie companies hang on longer because some private creditor will refinance a few times at higher rates and more dilutive terms until all the equity is wiped out and the cost or damage from the ultimate failure is higher and more severe-think markets do allow for more efficient corporate mercy killings)

Return of capital via stock repurchase has what effect? Where does that money go once returned to investors? Chasing declining returns in bond market? Forced into "frothy" equities?

Why no long-term investment by corporations? No one knows what is going to happen with climate change so long-term commitments verboten? Paralysis by analysis?

Reducing stock outstanding means the denominator in Earnings Per Share assuming no stock options are exercised to offset it. It’s a math equation, if my stock is trading at a price I believe to be low and my IRR or return on equity (or you can use NPV as well) from buying back shares and reducing the ownership float provides a higher return then that’s typically what they would do. So corporate America is screaming at the Fed that they don’t need the cash by their actions regardless of their words. It’s the Fed that believes their approach is the beat it’s not coming from that signal. Problem is we gave them a dual mandate - employment employment and currency stability. We as a country are older and slower growth. Juice only becomes sugar highs where the comedown requires more sugar. That’s where I believe we are at. There aren’t a ton of long term investments worth making in a Corporate sense at the moment. This isn’t inconsistent with a mature economy either which is what many folks miss, we aren’t in growth mode as a country realistically. So you get faux businesses that aren’t new like Uber (taxis-has never made a penny of profit and has a valuation higher than the.m bug three), AirBnB (hotels) with crazy valuations and a Venture Capital industry (long term investments for sure with a “2 pays for 10” investment model).

I’m the bond market comment yea because we as a country are getting older so folks collectively want more fixed returns and less principal risk. Meanwhile bond yields are government bond yield plus a credit risk spread. If they keep driving US Treasury yields down spreads will never adjust and so as bonds with risk go down in yield. Direct result of the Fed holding Federal a funds rate down.

As far as climate change I took that as a sort of metaphor not exactly referring to scientific climate change but maybe Im incorrect.

[Farfromgeneva]

[quote=Farfromgeneva post_id=

Return of capital via stock repurchase has what effect? Where does that money go once returned to investors? Chasing declining returns in bond market? Forced into "frothy" equities?

Why no long-term investment by corporations? No one knows what is going to happen with climate change so long-term commitments verboten? Paralysis by analysis?

Reducing stock outstanding means the denominator in Earnings Per Share assuming no stock options are exercised to offset it. It’s a math equation, if my stock is trading at a price I believe to be low and my IRR or return on equity (or you can use NPV as well) from buying back shares and reducing the ownership float provides a higher return then that’s typically what they would do. So corporate America is screaming at the Fed that they don’t need the cash by their actions regardless of their words. It’s the Fed that believes their approach is the beat it’s not coming from that signal. Problem is we gave them a dual mandate - employment employment and currency stability. We as a country are older and slower growth. Juice only becomes sugar highs where the comedown requires more sugar. That’s where I believe we are at. There aren’t a ton of long term investments worth making in a Corporate sense at the moment. This isn’t inconsistent with a mature economy either which is what many folks miss, we aren’t in growth mode as a country realistically. So you get faux businesses that aren’t new like Uber (taxis-has never made a penny of profit and has a valuation higher than the.m bug three), AirBnB (hotels) with crazy valuations and a Venture Capital industry (long term investments for sure with a “2 pays for 10” investment model).

I’m the bond market comment yea because we as a country are getting older so folks collectively want more fixed returns and less principal risk. Meanwhile bond yields are government bond yield plus a credit risk spread. If they keep driving US Treasury yields down spreads will never adjust and so as bonds with risk go down in yield. Direct result of the Fed holding Federal a funds rate down.

As far as climate change I took that as a sort of metaphor not exactly referring to scientific climate change but maybe Im incorrect.

[Farfromgeneva]

Can this conversation continue without copying the entire thread each time, guys?

Maybe just copy the last two or three exchanges each time?

Tried after your request but came through twice. Cutting editing and even spelling with auto spell correct etc is really brutal in phone while
Holding format in place. Since I can’t make any sense to anyone with the spelling I’m constantly trying to correct, sometimes 3-4x and it’s still changing back maybe I should just give up though. I have three monitors open with work so I don’t want to tie a screen up for this which apparently makes me lazy as well including the 7hrs I worked yesterday in my home office.

[lagerhead]

Can this conversation continue without copying the entire thread each time, guys?

Maybe just copy the last two or three exchanges each time?

Tried after your request but came through twice. Cutting editing and even spelling with auto spell correct etc is really brutal in phone while
Holding format in place. Since I can’t make any sense to anyone with the spelling I’m constantly trying to correct, sometimes 3-4x and it’s still changing back maybe I should just give up though. I have three monitors open with work so I don’t want to tie a screen up for this which apparently makes me lazy as well including the 7hrs I worked yesterday in my home office.

There is also a fundamental change in how interest rates. The LIBOR rate which every bank and borrower have used to predict hedge future interest payments is being eliminated and in its place a Risk Free Rate, the Secured Overnight Financing Rate (SOFR) is going to be used for new issuances Jan1, 2022. SOFR has no term rate or structure because it is a look back rate, like REPO. REPO is also having problems with some thinking it goes negative.

[Farfromgeneva]

Can this conversation continue without copying the entire thread each time, guys?

Maybe just copy the last two or three exchanges each time?

Tried after your request but came through twice. Cutting editing and even spelling with auto spell correct etc is really brutal in phone while
Holding format in place. Since I can’t make any sense to anyone with the spelling I’m constantly trying to correct, sometimes 3-4x and it’s still changing back maybe I should just give up though. I have three monitors open with work so I don’t want to tie a screen up for this which apparently makes me lazy as well including the 7hrs I worked yesterday in my home office.

There is also a fundamental change in how interest rates. The LIBOR rate which every bank and borrower have used to predict hedge future interest payments is being eliminated and in its place a Risk Free Rate, the Secured Overnight Financing Rate (SOFR) is going to be used for new issuances Jan1, 2022. SOFR has no term rate or structure because it is a look back rate, like REPO. REPO is also having problems with some thinking it goes negative.

I have a buddy who was a strategist at Citi for a while been w Kroll a few years by the name of Ethan Heisler. Kroll doesn’t have a pay wall so anyone can have access to their research. Ethan has been obsessed with this conversion for two years every time I catch up with him, most recently had him come to a regional bank investor conference I was speaking at and same topic on his mind. Anyway, I’d encourage you to check it out he’s very smart in his domain. This was the most recent one which touches on reverse repo don’t recall sofr being in there.

https://documents.kbra.com/report/52349 ... -july-2021

All that being said I don’t think that’s driving this situation. Folks are using other indices like FHLB borrowing rate etc. small regional and community banks don’t get involved in swaps much so typically use prime which is really stale. The term structure can be derived w/o libor though. I think it’s just more barbelled balance sheets these days that’s why the belly of the curve seems to move around more than it used to when you had a real positive sloping curve in the past. Seems like it’s more that the term spread is so flat.

[lagerhead]

Can this conversation continue without copying the entire thread each time, guys?

Maybe just copy the last two or three exchanges each time?

Tried after your request but came through twice. Cutting editing and even spelling with auto spell correct etc is really brutal in phone while
Holding format in place. Since I can’t make any sense to anyone with the spelling I’m constantly trying to correct, sometimes 3-4x and it’s still changing back maybe I should just give up though. I have three monitors open with work so I don’t want to tie a screen up for this which apparently makes me lazy as well including the 7hrs I worked yesterday in my home office.

There is also a fundamental change in how interest rates. The LIBOR rate which every bank and borrower have used to predict hedge future interest payments is being eliminated and in its place a Risk Free Rate, the Secured Overnight Financing Rate (SOFR) is going to be used for new issuances Jan1, 2022. SOFR has no term rate or structure because it is a look back rate, like REPO. REPO is also having problems with some thinking it goes negative.

I have a buddy who was a strategist at Citi for a while been w Kroll a few years by the name of Ethan Heisler. Kroll doesn’t have a pay wall so anyone can have access to their research. Ethan has been obsessed with this conversion for two years every time I catch up with him, most recently had him come to a regional bank investor conference I was speaking at and same topic on his mind. Anyway, I’d encourage you to check it out he’s very smart in his domain. This was the most recent one which touches on reverse repo don’t recall sofr being in there.

https://documents.kbra.com/report/52349 ... -july-2021

All that being said I don’t think that’s driving this situation. Folks are using other indices like FHLB borrowing rate etc. small regional and community banks don’t get involved in swaps much so typically use prime which is really stale. The term structure can be derived w/o libor though. I think it’s just more barbelled balance sheets these days that’s why the belly of the curve seems to move around more than it used to when you had a real positive sloping curve in the past. Seems like it’s more that the term spread is so flat.

Thanks for the link.

in speaking with the dealers they are concerned they cant hedge issuing a 30 year bond if they don't have a fix/float structure to move the long bond into. Little regional banks like Ameribor, some of the dealer would prefer to see BSBY the Bloomberg rate which does have a forward looking curve and fix/float. Hard to hedge bonds without that structure, issuances may dry up in the short term.

[Farfromgeneva]

Can this conversation continue without copying the entire thread each time, guys?

Maybe just copy the last two or three exchanges each time?

Tried after your request but came through twice. Cutting editing and even spelling with auto spell correct etc is really brutal in phone while
Holding format in place. Since I can’t make any sense to anyone with the spelling I’m constantly trying to correct, sometimes 3-4x and it’s still changing back maybe I should just give up though. I have three monitors open with work so I don’t want to tie a screen up for this which apparently makes me lazy as well including the 7hrs I worked yesterday in my home office.

There is also a fundamental change in how interest rates. The LIBOR rate which every bank and borrower have used to predict hedge future interest payments is being eliminated and in its place a Risk Free Rate, the Secured Overnight Financing Rate (SOFR) is going to be used for new issuances Jan1, 2022. SOFR has no term rate or structure because it is a look back rate, like REPO. REPO is also having problems with some thinking it goes negative.

I have a buddy who was a strategist at Citi for a while been w Kroll a few years by the name of Ethan Heisler. Kroll doesn’t have a pay wall so anyone can have access to their research. Ethan has been obsessed with this conversion for two years every time I catch up with him, most recently had him come to a regional bank investor conference I was speaking at and same topic on his mind. Anyway, I’d encourage you to check it out he’s very smart in his domain. This was the most recent one which touches on reverse repo don’t recall sofr being in there.

https://documents.kbra.com/report/52349 ... -july-2021

All that being said I don’t think that’s driving this situation. Folks are using other indices like FHLB borrowing rate etc. small regional and community banks don’t get involved in swaps much so typically use prime which is really stale. The term structure can be derived w/o libor though. I think it’s just more barbelled balance sheets these days that’s why the belly of the curve seems to move around more than it used to when you had a real positive sloping curve in the past. Seems like it’s more that the term spread is so flat.

Thanks for the link.

in speaking with the dealers they are concerned they cant hedge issuing a 30 year bond if they don't have a fix/float structure to move the long bond into. Little regional banks like Ameribor, some of the dealer would prefer to see BSBY the Bloomberg rate which does have a forward looking curve and fix/float. Hard to hedge bonds without that structure, issuances may dry up in the short term.

I’m sure you know the vol model in Bberg is trash. Interesting notes you’ve provided here for me though as I do more front end credit and operational strategy these days and less active cap markets so I don’t pay as much attention as when I was involved with a prior employer’s CDO squared and underlying book of structured credit derivatives and Lev loans and/my CRE CDO. What you say makes sense except I’m skeptical of the conclusion.

There’s always “natural” hedges. Theyre used all the time. CMBX isn’t a perfect hedge for a new issue CMBS deal but they still get away with it. Can’t imagine the lack of a direct index hedge would keep dealers from issuing, it’s a Monte Carlo simulation meaning they’ll all continue to do it out of fear someone else will do it anyways or with another solution (I bought into the first tri party hedge on a ethanol construction deal involving corn, Nat gas and ethanol which has an overall naked i correlated risk-it don’t work there’s $18mm gone)

[PizzaSnake]

Can this conversation continue without copying the entire thread each time, guys?

Maybe just copy the last two or three exchanges each time?

Yes.