This page has been archived and commenting is disabled.
Here Is Why The Fed's Strategy Of Getting Retail Investors Into Stocks Via QE2 Will Fail
One of the more obvious side-effects of Ben Bernanke's simplistic QE 2 plan is to force retail investors out of their existing trajectory directed at fixed income products, and back into stocks, so that retail can once again occupy it long-coveted (by the bankers) position of buying Apple and Amazon at triple digit forward multiples. Unfortunately, as JPM's Nikolaos Panigirtzoglou explains, all that QE's lowering of bond yields will do (in addition to sending soybeans limit up every day for the balance of 2010, despite what others claim is merely a hallucination) is "reinforcing retail investors' flows into bonds." The biggest problem with the secular shift away from equities, and into bonds, is that the very mindset that the banking cartel loved for so long: retail buying stocks high, buying even more higher, has now translated completely into bonds. As JPM says: "The more bonds rally, the stronger the buying of bond funds by retail investors." In addition to the daily flash crashes in now countless names, surely this phenomenon explains why retail investors have taken money out of stocks for 23 weeks now (leaving many mutual funds running on fumes and a prayer) and put it into the best performing asset category (after precious metals of course). And QE2 will cement not only retail, but institutional demand for bonds as well: "lower bond yields are widening the deficits of pension funds in both the US and Europe inducing them to move further into fixed income to reduce the mismatch between assets and liabilities... This raises the risk that these institutional investors will move more towards corporate bonds in search for yield. So a potential aggressive move away form government into corporate bonds could exert strong downward pressure on credit spreads." Suddenly the world will realize that the average duration on rate-based exposure is 10+ (especially if Mexico issues a few more 100 Year bonds). And when rates creep up even a tiny little bit, it is game over as the next negative convexity event will be the (credit) market itself. Which is why we have long said that the black swan is not a failed auction, but the merest hint that rates are finally starting to creep up.
More from JPM on this psychological quandary, so very troubling for the Federal Reserve, as well as on other "unexpected" consequences of QE2. Pay close attention to where JP Morgan spits in the face of so many CNBC idiots, and flatly ridicules the whole money on the sidelines bullshit:
By lowering bond yields, QE is reinforcing retail investors’ flows into bonds. Retail investors flows into bond funds tend to be a function of past 12 month returns (see Chart 1). The more bonds rally, the stronger the buying of bond funds by retail investors. Bond funds have generated impressive, close to double digit, returns for second year in a row and the continuing decline in yields is increasing the attractiveness to retail investors. Even if bond yields stop declining and bonds returns become coupon-like, i.e. 2-3%, retail flows into bond funds are unlikely to turn negative. To a large extent bond funds are benefiting from a structural move away from money market funds as the implosion of SIVs and the Lehman crisis dented investor confidence in money market funds. In addition a cyclical environment of close to zero short rates, makes money funds or bank deposits unattractive relative to bond funds. Bond fund returns will likely have to turn negative for retail investors to start selling them. This requires a significantly rise in bond yields, something that it is unlikely to happen as long as QE is underway.
QE is also reinforcing institutional investors’ demand for bonds. As shown in the section below, lower bond yields are widening the deficits of pension funds in both the US and Europe inducing them to move further into fixed income to reduce the mismatch between assets and liabilities. At the same time historically low bond yields are making both pension funds and insurance companies thirsty for yield. This raises the risk that these institutional investors will move more towards corporate bonds in search for yield. And their buying power is big. As Chart 2 shows, pension funds and insurance companies typically buy $100-$150bn of bonds per quarter. So a potential aggressive move away form government into corporate bonds could exert strong downward pressure on credit spreads. The search for yield induced by QE creates a sweet spot for credit.
- QE is also causing a decline in the US dollar forcing EM policy makers towards more intervention. One form of intervention is for EM policy makers to prevent an appreciation of their currencies by acccumulating foreign currency reserves (e.g. China). Because these reserves are typically invested in US and European government bonds, this exacerbates the bullish momentum in core bond markets. Another form of intervention is to impose taxes on investment flows especially those in bonds (e.g. Brazil). This forces DM bond investors, who were hoping to get an extra yield in EM bond markets, to retrench back to their own bond markets, again exacerbating the bullish momentum in core bond markets. In the 2010 survey on European pension fund allocations intentions by Mercer, the biggest shift was towards EM bonds. This shift is now becoming more difficult following a renewed wave of EM policy intervention. It appears that a “currency war” has already began in EM, and the refusal of China to revalue its currency makes it more likely that EM interventionism will intensify rather than subside from here, amplifying the buying flow in core bond markets.
- QE is establishing the dollar as a funding currency for carry trades. The dollar carry trade has intensified more recently as shown be recent flows and positions in the section below.
- QE is creating a regime of low bond yields but also higher uncertainty. At the least, QE makes central bank exit more difficult and raises the risk of a policy error. Higher uncertainty boosts demand for assets such as gold, which has become to the eyes of high-net worth investors, the ultimate hedge against tail risk. ETF holdings of physical gold reached a new record at the end of September.
Lower bond yields as a result of QE make equities more attractive from a valuation point of view, but we think a sustained move away from bonds into equities is improbable. First, as explained above, for retail investors to change their buying pattern, absent a significant rise in bond yields, which is unlikely as long as QE is underway. Second, higher uncertainty makes it less likely that corporates will engage into large-scale debt-financed equity buying. Cash holdings are high among corporates but so is net debt (see Chart 3). [YES LADIES AND GENTLEMEN, EVEN JP MORGAN IS REFUTING THE MONEY ON THE SIDELINES LIE]. Elevated cash holdings do not have to be deployed into equity buying. They can be used to repay debt. Or elevated cash holdings might reflect a new desired level of liquidity given that memories of Lehman are still fresh. As explained in Flows & Liquidity Sep 24, corporates tend to become active buyers of their own equity later in the cycle, 2-3 year after the expansion begins.
»
- 10338 reads
- Printer-friendly version
- Send to friend
- advertisements -
Is this the bit where you say 'bitchz'?
Here's one;
"We are not here to heap mountains of debt, on our children, and our grandchildren. That is what was done in the last eight years in the Bush administration. This budget calls a halt to that, and says NO! Says no more debt, we’re going in the opposite direction" - Democratic Congressional Speaker of the House, Nancy Pelossi, April 29th 2009, as Obama’s first Budget passed through Congress.
Ok, sorry, junk away...
If only we could junk Nancy. One wonders if:
a) she is smart enough to know she is lying
b) she is smart enough to understand that no one believes her or if she just thinks that people are SO STUPID and bovine that she can say anything without repercussions.
Retail investors are all but noise compared to the cash-equivalents that corporations and rich individuals are holding (and hoarding).
Lowering long-term bond income is a way to force them to re-think their investment strategy - otherwise they'd lose money. Furthermore, increasing expected future inflation is a way to get corporations to invest more into future demand.
why the fuck would people move money into bonds...aka future dollars......on the expectations of a dollar devaluation?
That's my entire point - they go out of bonds and into the real economy.
Via QE2 the Fed is implementing a -1%..-2% effective interest rate policy in essence: if you stay in bonds (or cash) you will lose money.
There is a general public perception that fixed income is a safer asset class than stocks. Where would they get a crazy idea like that?
This general public perception is reinforced by the actions of the bailout Talibani led by Mullah Ben himself.
Your average 401(k)/retail investor is in asset protection mode. Yield and appreciation is nice, but first make sure I don't cede more of my nest egg to the HFTs.
Because in a bankruptcy the shareholders are wiped out and the bond holders become the equity holders. Plus there is a guaranteed return on bonds if held to maturity and there is no guarnantee that equity is anything but a scam poker chip.
And as they say....the world isn't getting any younger..
Sure, but with credit spreads falling stocks are becoming undervalued in relation to bonds.
Soon, with no spectacular crash coming, stocks will rally, they have to.
"Soon, with no spectacular crash coming, stocks will rally, they have to."
Interesting thoery. Recent history shows stocks so up in the absence of a significant, "oh fuck" moment. The more stocks rally based on the assumption of free Benny bucks, and nothing else, the greater the digital risk that even Bernanke realizes sending the US economy into a hyper inflationary spiral in order to bail out a bunch of felon bankers.
So you do not see any heightening macro risks? We've got $85 oil, $1,350 gold, 10% unemployment (U3) and 42 million on food stamps. Something is deeply, deeply wrong.
Unless you were a GM bondholder, in which case laws were ignored to garner Union political support. Welcome to Amerika.
While JPM may be right in the short term, QE2 puts the US dollar on the fast track to collapse. I don't think anyone here missed the fact that in Greece, etc., interest rates rose very fast in a crisis.
While it is possible that the Fed can buy all Treasury debt (even though the New York Fed specifically said recently they would buy only up to 35% of any specific Treasury issue), that would not stop rates outside of the Treasury market from rising. If then you could get 10% in a CD or double your money in a gold stock, why woudl someone continue holding bonds yielding 2%?
If the Fed passed new rules to try to get around its 35% rule, that may be the kind of black swan event that sets off a combined dollar/bond crash before the Fed could go all in.
JPM has no concept of anything other than "the short term!"
You're right--the Fed only has so much control over rates. There will be a point where they lose control when the bond vigilantes rear up again in the secondary market. One of the black swans that the Fed has busted the 12-ga out on is the bid-to-cover ratio at auctions. Does anyone even believe the number anymore, when we know what's going on at these auctions with massive Fed intervention as a "bidder"? The Fed could very well be including itself as a few hundred "bidders" for the sole purpose of pushing up the B-C. The one of the first signs of a failed auction as it was going live would be a poor B-C, right? Well, we'll never know, because the number is bogus.
JPMorgan may do everything for th short-term, but they certainly understand the long-term by pulling profits from the future into the short-term using derivatives. The real question is why?
Is it that those at the top are simply greedy pigs? (greedy pigs yes, simply, no... don't need another few millions of fiat toilet paper)
Is it that there will be no future or one so dramatically different that what they do in the short-term has no effect on the long-term? (live it up while you can, eh?)
Is it necessary to a bigger plan? (most likely)
Totally.Obvious.Intervention.Lets.Equities.Thrive = T.O.I.L.E.T
following the '29 crash bonds rallied, especially corporates and particularly after the equity bear rally peaked in april '30. then as the reality of the depression sank in over the next four years those same corporates had a great crash too. even treasury yields rose for three years or so, then declined substantially over the next eight years or so, bottoming around 1940 i think. 2009 and 2010 feel like the period between october 1929 and late 1930, imo (though i wasn't there).
So, based on your comparison to the Big-D timeline, when does it get undeniably bad? When do the sheeples know they've been fleeced? 2012? 2015? Never?
Elevated cash holdings by corporations might also reflect a desire to hoard cash in preparation for buying assets at fire sale prices once it all hits the fan.
George ... The Greek ... From Canada
Yes, but corporate debt is also high and who is the owner of that debt? The debt owners are the winners in any collapse.
Enter the re-introduction of a time-tested strategy: jawboning.
Otherwise known as herding.
Ride em in, cut em out....
http://www.youtube.com/watch?v=Sl2fONPgIJE
All regular readers of ZH know by now that the FED "owns" the stock market lock, stock, & barrel. If anyone wants to own stocks there can be only one reason during this schema period between deflation & inflation; as a claim to the underlying assets of the corporation. The only stocks I want to own have underlying commodities on/in their balance sheets. The FED can own the dregs of the other 95% or so.
In hyper-inflation, the only other stocks to own after they have all crashed & burned are the basic industrial companies that have survived the Keynesian holocaust. For now, stay focused on hard assets; the rest are likely not going to survive the crisis. They will become what Graham & Dodd described as "cigar butt" stocks. Trade them on the curb...
The FED owns the stock market lock stock and barrel and trillions worth, and has absolutely no one to sell it to.
Why would they ever want to sell it? They traded fiat toilet paper for controlling ownership of the Dow. Which would be worth more in a collapse?
However many companies have more debt than net tangible assets so the bond holders would be the new owners in a collapse.
Road map to trading the market this week
http://bostonwealth.blogspot.com/2010/10/mortie_10.html
Yet another example of one of the cogs in the "Perpetual Motion Machine"...
Lower rates, higher deficits, infinite spending, and infinite monetization, fueling even higher bond prices.
Right now it cannot be stopped.
Bond yields to .002%, and the deficit climbs into the quadrillions!
Put up a chart of DBA (Ag commodities ETF)..................................
well, well, well...
Where did Obama's entire economic staff go?
nuff' said.
The demographic group that had disposable income to propel the economy from 1983 to 2000 is now past their peak buying years. The next big wave of buyers as big as the previous one mentioned is 12 years behind the first group.
So the current group that is not buying anymore and is 50-60 yrs old has seen:
1)Their 401ks decline 35%
2) stock and mutual funds decline 40% and only recovered a small amount
3) their house decline by 30% and is either under water or cant be used as an atm
4) have seen their neighbor fired and feel they might be next
5) saw the financial system crash in 2008 and the Flash crash.
Its this group that is withdrawing all their money over the last 24 weeks and they WILL NOT BE BACK.
The next demographic wave of comperable buyers is 12 years away.
I went to an 85% weighting in bonds four years ago when a 5% return was not cool. I've been taking the 20-25% capital gain for the better part of 4 months now and have more unwinding of corporates less than 2015 maturity to go. I've been shifting these funds into zinc miners since there are some real supply issues coming down the pipe.
I guess you bought right at the bottom and sold right at the top too?
Who cares?
I see this but wonder why all the insider sales? What do they know or fear? Is it that whatever the equities do in the future, their relative value will not exceed the rising value of another asset class, the one they're moving into.
What could that be??? What could that be???
Let me start with I like ZH. Been around here over a year or so and for the most part, it's informative. What drives me insane though are all the people almost craving disaster.
Put up a post on BP killing the gulf and 500 comments on "we're doomed". Put up a post on a volcano erupting in Iceland and "this will kill international trade". Put up a post on foreclosure screw ups and "here's the black swan". Put up a post on "currency wars" and it's "stock up with bullets and dry goods".
Bizarre world here. Mostly good, informative posts but a ton of cheerleading for doom. That's the sad part. Stop hoping for chaos and riots and volunteer to help those less fortunate than you. Anything good. Just please stop the pom poms for the end of the world. It's getting a bit silly.
Generally agree. I hang out here since I am generally skeptical of the Wall Street bullshit. Doug Noland over at Prudentbear.com guided me through the financial disaster totally unscathed while the main stream media was still cheerleading but he has lost his edge. ZH on the otherhand has figured a few things out weeks before everybody else and for this I am grateful. Misery loves company however and the systemic issues with the US economy breeds plenty.
The truth comes out in joking ways. When someone makes an acerbic remark about disaster or it appears they are rooting for it is a weird dynamic. Most likely the person has already come to believe that the fundamentals say the mkt should be thousands of points lower. The disaster rooting is frustration that by manipulation the mkt is'nt already there. And NO One really wants disaster or for others to be harmed. But the fact is they will be.
For example I traded crude oil waiting for Katrina to hit. The more devastation that was caused the more money i would make. So because you are doing your job as a speculator you by definition sometimes benefit from disaster while at the same time hoping no one will die ( but knowing they will)
Hurricane season is from june 2nd to nov 30th. Every 3 days a tropical wave comes of the coast of Africa. Not all tropical waves turn into hurricanes, but most hurricanes were once tropical waves. Joe Bastardi, a brilliant weatherman gave everyone the heads up that there will be a disturbanse in the gulf next month. 3 weeks later a tropical wave came off Africa that was 1011 millibars. It was understood that if that thing makes it into the gulf it will become a Cat5 hurricane. After following it for a week i bought a massive position in the 70calls in crude. Crude had never traded above 60 before in history. The world still did not know what was coming because the tropical wave became a tropical disturbance #10, broke apart and down graded, regained strength and got a different number. number 12. My position was taken then before the world learns of it. As it approached Florida it became a tropical storm and now got a name... Katrina.
So during this entire time i am in the position of knowing that the most devastation imaginable would make me millions.
Did i want anyone to die ? No. But i knew the chance that someone would was great.
So when people make these childish disaster jokes. Its because we know the disaster is coming. We dont want anyone to suffer. But we know they will. And we just make Trading Floor acidic banter about it.
Completely agree. I read Zerohedge daily as the market analysis and news aggregation on here tends to be way ahead of anywhere else. Having said that reading the comments section too often will have you heading to the nearest bridge. Add to that the all too frequent 'everything's a conspiracy' and it can be hard work having informed discussion about a particular post.
FMJ - it's not a conspiracy, the best crimes ever committed are done in blistering sunlight and the participants don't even know they are doing it. It simply is the natural instinct of greed which is driven by everyone's instinctual need to be reproductively successful left unchecked by the rule of law which has now been usurped by the former points.
In fact, they are not even crimes until reflected upon in hindsite. But this is where CD will step in and add some more color if he is watching.
Instead of heading to the nearest bridge, might I instead suggest:
1. Take protective measures.
2. Warn your family and friends.
1. Have done
2. Easier said than done - why won't anyone listen?! If any other market was performing like PMs people would be asking for my opinion, however no one shows any interest.
Sorry the point I was trying to make is that sometimes you just have to play the hand you're dealt and unfortunately can't do much about it. The world has been through worse and although this will be much more uncomfortable than people suspect it won't be the end.
Don't matter. The Fed.Gov is just going to take it all anyway...
http://www.humanevents.com/article.php?id=39336
Here's a hint - you don't have hearings on something like this unless you're damn-well going to try to do it.
IDK guys they have Booyah Skedads Jim Cramer on MSNBC Morning Joe trying to get the message out to the retailers and Jersey Shorites that Foreclosure Gate will not be such a horrific event.
Update:
Cramer says win for America homes prices will strengthen. It is not about anger for banks is all about America.
Cramer is everywhere. Turn on College Gameday - Cramer doing a spot. Post something here, Cramer staring back at me telling me to Trade Like a Hedge Fund Manager. I can't wait for him to start giving buying advice by yelling like the guy in Robocop, "I'd buy that for a dollar!"
Classic distribution top...
Where was the smart money going initially ?
And where will it be leaving ?
THEY win again.....
............................
The exchanges have to be totally revamped before RETAIL really comes back...
Will this happen ?
Think again....Not with the current captured SEC....
bubbles bubbles everywhere, and not a drop to drink.
It is interesting to try and predict what the coming political tsunami will mean for markets: fx, bonds, equities and commodities.
http://www.businessinsider.com/republican-house-takeover-odds-october-11...
http://www.realclearpolitics.com/articles/2010/10/07/the_democrats_dead_...
It seems to me that QE will begin to bump against the hard rocks of a looming austerity.
Could that be a black swan?
1% of the populace owns 83% of all equities. This is who it benefits, not the general public, for whom there is inflation in the things we need, deflation in the things we own.
If you don't know whether you'll have a job tomorrow, or, if you're 50 and likely to never work again, there is no such thing as "risk capital."
+99%
The people buying groceries at Walmart at 12:01 AM on the first of every month aren't worried about QE2's effect on the DOW. To them DOW makes toilet bowl cleaner with scrubbing bubbles. They will notice $5 then $10/gal. gasoline and milk.
I agree with most of this, except:
"Bond fund returns will likely have to turn negative for retail investors to start selling them. This requires a significantly rise in bond yields, something that it is unlikely to happen as long as QE is underway."
QE will initially lower yields but then push them upward as inflation increases. Even just 5% inflation will be major havoc, as the financial sector including public and private pension funds are betting everything they have against it.
"corporates tend to become active buyers of their own equity later in the cycle, 2-3 year after the expansion begins."
Corporates are already active buyers of their own equity, taking advantage of record low rates to fund buybacks with bond issues. For the past three quarters (through 2q10), nonfinancial corporate net issuance of equity has been negative, at an average annualized pace of about $230 billion, while their net issuance of bonds has been positive, at an average annualized pace of about $310 billion. Corporate bond issuance is also funding dividends.
Good summary. The slightest uptick in interest will turn into a rout. They wouldn't have leveraged any of those bond bets? Surely they have learned that lesson, tee hee.
Commodities getting monetized is bad, very bad. From now on, all pricing is a crap shoot.
A different take on the rationale of QE2. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/805406...
"The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 `a l’outrance’ to flood your economies with excess liquidity"
ucvhost is a leading web site hosting service provider that is known to provide reliable and affordable hosting packages to customers. cheap vps company believes in providing absolute and superior control to the customer as well as complete security and flexibility through its many packages................ windows vps Moreover, the company provides technical support as well as customer service 24x7, in order to enable its customer price. Thanks forex vps | cheap hosting