This page has been archived and commenting is disabled.
Here is Why Zero Hedge is Wrong!
What does a politician telling the truth, the federal reserve pausing from money-printing, and Tyler Durden being wrong have in common?
Although rare, they do happen.
Recently, Zero Hedge has been frothily arguing that, upon the conclusion of QE2 POMOs, appetite for U.S. Treasurys will abrubtly plunge and send yields sky-rocketing. Unfortunately, such a hypothesis fails to take into account forward-looking expectations and is therefore wrong.
This is not to say that Treasury prices will continue fall, which may or may not occur and depends upon a myriad of variables. But it will not happen because QE2 stops. Here are the three main reasons as to why:
1. Markets are forward-looking and are not impacted by known variables (also known as market efficiency)
Although market efficiency as a theory is not widely accepted by any means, any reasonable person would agree that upcoming and certain events should have no material effect upon market prices. Given that the termination date of QE2 has been sufficiently telegraphed to the market, there is little doubt that it is already priced in.
2. The maturity profile of the Federal Reserve`s assets is irrelevant. What matters is the extent to which the market believes that they will roll over their holdings in the future.
Even if there are 0 prepays and most of the Fed`s asset run-off is concentrated 2, 3 or 5 years from now, the market understands that the Fed will have the option of reloading at that time. Further, if the economy begins to deteriorate and succumbs to deflation, the Fed could even signal to the market that they will be rolling a portion of their assets in the future.
3. Don`t Fight the Fed.
The Fed will find a way to maintain inflation and debase the currency and its weapon of choice will be to stimulate artificial demand for Treasurys. This has always been the modus operandi of the Fed and there is no reason to believe that the end of QE2 will mean the end of propping up the Treasury market when necessary.
To conclude, the end of QE2 will not and can not result in the demand for Treasurys immediately falling off the cliff. Of course, Treasury yields are likely to slowly rise as horizon inflation comes to the fore and as investors lose faith in the U.S. government and the U.S. dollar. Yields may even spike as investors panic and flee out of the dollar.
But yields will not rise simply because the pre-announced QE2 date arrives.
»
- advertisements -
1. Market efficiency: there's a dead theory. And, as if the markets believe the Fed. Mrs. Yellen can do all the yellin' she wants but the blah-blah theory of monetary policy won't work.
2. You have a point here. But reloading will be a signal to the market that more inflation is on the way and with that the expectation of higher interest rates.
3. This argument contradicts itself. If it can stimulate inflation to prop up the market, wouldn't that lead to an expectation of higher interest rates and thus demand would slacken and drive prices down? Also, their inflation stimulus has been working but it has been taking forever because of the inflationary inefficiency of QE. It's not like they can just turn on a switch. I don't think price changes will be gradual at all.
"But yields will not rise simply because the pre-announced QE2 date arrives."
Luckily the forward looking markets will tell me exactly what will happen to rates in the future
3. Don`t Fight the Fed.
Silver, bitchez!A simplistic guess using a boat navigation analogy. The Fed's QEs and POMO are one oar of the row boat, while Equities are on the other oar, and the dollar is the rudder. Fed's buying of treasuries keeps rates low and the dollar's value diminshes while risk on confidence from Fed support raises equities. The relationship of equity prices are balanced-directly proportionate with bond prices, and inversely proportionate to the dollar value. The economy is the river, and the relationship of the three variables may change according to current events, and steepness of the curves. The anticipation of current change (end of POMO and QE) causes risk off pressure on the equity oar, and the bond oar continues rowing even without QE and POMO in a flight to safety-risk off trade, keeping yields low. The dollar stabilizes to prevent the boat from capsizing. This is near term on a short stretch of a "Deliverance" type river.
The official policy of the world's power elite remains reflate risk assets & introduce inflation in the economic system. The Fed is desperately trying to avoid a long period of debt deflation.
Lets have a closer look at the arguments here. First of there is the argument that Markets are forward-looking which I think is only partially correct. What is priced in is the expected result of the end of QE2 which to some extent is based on the end of QE1. QE1 was about MBS and not treasuries and at the end of QE1 there was a certain amount of MBS hedging which needed to be done which was not needed in QE1, which affected the treasury market. The expectation is also based on the fact that at the moment due to POMO activity and the FDIC rule changes there are not enough treasuries around. The market has changed and a number of players have left the tressury market due to low yields, while we know treasury liquidity is reduced due to PMO activity involving recently issued treasuries. The balancing of the scales with these factors is not easy and I think the lack of market participants at current yields will weigh heavier than the market thinks. SO forward looking, but based on backward looking data.
Next we have the suggestion that the Fed has the option to roll a portion of their assets in the future, which is true except that this could be like a red flag to a bull where investors are concerned.
Lastly we have the concept of not fighting the Fed. This is an important physcological factor, but history is littered with central banks who have at some point lost a battle with the markets. The fed could start QE3 or other accomodative policies, but I think the political headwinds might be too great until later on.
The most likely result I think is a slow rise in yields until the likes of PIMCO decide to get back into the market. Unfortunately I think imported inflation through commodity prices (yes they will drop, but not as far as some think and will resume a more steady rise) and a further decline in housing due to yield rises and mortgage costs will change political perceptions. At this point there is a risk that QE3 will be contemplated and all serious ideas about spending cuts will go out of the window. The market will then take a good look at the dollar and whether the US really does have an exit strategy from its accomodative policy.
In conclusion I think the post is partially right at least about falling off the cliff, but wrong about the market pricing in the event correctly. We should perhaps mention that the end of QE in the UK had the opposite effect, which could occur in the US as well, but this was more about european debt problems ,rather than the end of QE and you have to take into account that gilt yields were not as low as treasuries.
The patient's bleeding out, the deep femoral artery ruptured. Medics apply pressure to the wound to no avail, impossible to tourniquet. The emergency requires blood. Lots of blood. They select a plasma pack labeled TARP, it buys them time until they can find a donor.
The patient is stabilized but faltering. A donor is found and the infusion pack coded QE1 is inserted and color returns to his cheeks. The blood pack is all too soon depleted, patient deteriorates, direct infusion from donor to patient is set up, procedure registered as QE2.
The patient drains the donor, both placed on life support.
The doctors convene a meeting with a grim prognosis: Withdraw the infusion and the patient will die, can't stop the bleeding. The donor, being overly generous with his life blood, has been weakened beyond redemption.
What to do, what to do?
Only on ZH will you read so many informative and high quality comments beneath such a wishy-washy and not very well articulated post.
This has always been the modus operandi of the Fed and there is no reason to believe that the end of QE2 will mean the end of propping up the Treasury market when necessary.
To conclude, the end of QE2 will not and can not result in the demand for Treasurys immediately falling off the cliff.
This piece is ridiculous for a number of reasons, the first one being that it cites the 'efficient market theory' which most successful traders, especially Buffet, lambast. The second is for the slick little sylogism cited above. It is saying the end of QE2 wont cause Treasury demand to dry up, then goes on to say the Fed will continue to secretly continue buying Treasuries.
Tyler has never denied QE3 or stealth QE, but has said it is likely, based on Treasuries demand falling off a cliff because of the end of QE2, and round and round we go.
Gold bitchez
Ok so everyone including cog diss who thinks the author is wrong is now on record as saying bondholders will be caught by a surprise rise in rates at the end of qe2.
Those who believe the bond market has already adjusted for the end of qe2 are on record as saying that any.changes in rates will be negligible at the end of qe2.
Some of you have so cavalierly dismissed the arguments that it will be interesting to bring this up again for comments at the end of qe2 bevause you guys are saying.bondholders are stupid. I say the.bondholders are much smarter than you give them credit
The Fed holds most of the bonds you ignorant scumtroll. Regardless when QE2 ends bond prices will go up, but then the Fed will jump in to "save the day" but in reality make matters worse. Stop with your acedemic nonsense... if you had any sense you'd understand we're discussing short term. Get that longer term mindset out of your foolish brain because who the fuck knows what the fed will plan next. Jesus christ, smarten up! And go back to your Prag....xxx nonsense so we can discuss more imporant issues that are clearly over your dumbfounded head.
I am discussing short term too. You conspiracy freaks are saying that bond yields are going to rise precipitously on the day qe2 ends or the very next bond auction.
What is even funnier is you clearly dont know anything about bond prices and yields. You just told me you believe yields or the interest rate will go down at the end of qe2.
My bad, yeah flip that. IF the Fed does stop purchasing Bonds prices will go down and yields will go up but it's unlikely that the Fed would actually stop buying bonds.
There is no way there will not be QE3 thru QE11. It may not be spelled out July 1st, but do think this mad man will let the markets sink at that point. He will keep buying, quietly if need be but he will not stop. It is just like a heroin addict who trys to stop. Just cannot do it, just one more fix, and I promise that will be the last. Efficient markets, those are words for an old dictionary.
When the markets make him stop and he blows up the system...Then it is over. Not before.
Any yes, I support this site regularly. Without Zero Hedge....we have Katy Kuric, God help us.
Beware the false analogy
John Mauldin has a good piece out today, interview with a friend (Casey Research I believe) who argues that the FED will cut QE2 short early June to see "what happens" to the markets and economy.
That way, they have "bullets" to finish QE2 and follow on with QE3.
Makes sense, especially if it punishes commodities for a bit and J.P. Morgue and the other "wired" TBTF banks know it is coming.
More QE is my opinion, and that we are on the Japan trajectory, but I would not doubt a FED "surprise".
Just think of 2005 after everyone had taken out a home equity loan or ARM tied to the Prime Rate and Greenspan decided to hike rates.
DOH!
It was the beginning of the crash, but also the beginning of Wall Street taking their chips off the table before the American Household.
You are entitled to your opinion and you have the freedom to state it. However, you show by your rude argument, that you really don’t belong here.
What Willie Sutton did with a gun, Bubbles does with paper.
Who else is going to buy the debt?
This Fight Club round goes to Big Bad Tyler Durden...
Uptown got it's hustlers
The bowery got it's bums
42nd Street got Big Tyler Durden
He's a pool-shootin' son of a gun
Yeah, he big and dumb as a man can come
But he stronger than a country Ox
And when the bad folks all get together at night
You know they all call big Tyler "Boss", just because.
And they say...
You don't tug on Superman's cape
You don't spit into the wind
You don't pull the mask off that old Lone Ranger
And you don't mess around with Tyler Durden.
http://www.youtube.com/watch?v=BAFUaB5Q-Ho
I think hussman's work adds on liquidity preference meaningfully to this discussion...
http://www.hussmanfunds.com/wmc/wmc110411.htm
What a load of bullshit. There is no market. The fed is the biggest owner of treasuries because the world stopped buying long ago. When the QE scam stops working they will cook up some other scam and so on forever or until the whole damn country blows up.
Interesting to take on Tyler. We exchanged a few emails on just this subject recently. I kicked in this comment:
I think the US market can absorb a few trillion of short dated paper. Out to two years. They just have to pay up for it. The banks will just buy it and hedge it.
20 years ago I ran money in Treasuries. It was no problem to buy 5b of ten year duration with 2% down. The numbers are very much bigger today. When it get to the shorter maturities I think there is still depth. The two year will have to go to at least 2%. But not a crisis.
Tylers's response:
Respectfully disagree
So there you have it. If you read ZH you know that Tyler has been spot on with these things. I must admit, his words have me looking over my shoulder.
We shall see.
There are some confusing signals here, but if i am going to choose between a market efficient enough to anticipate a widely announced ending of qe2, versus bill gross who screwed up the last time he tried to front run the end of qe1, then i will believe the market.
The bond market says the end of qe2 is a non event.
Regarding point #2: The maturity profile
An examination of the holdings and maturities of SOMA:
http://www.newyorkfed.org/markets/soma/tnotes.html
shows that things start to get interesting starting in Feb of 2012.
As with all calculations, consideration of any capital gains tax to be paid needs to be considered at least 1 year from intent to close a given position as a gain. This is the meaning of "priced in".
there is no market efficiency because there is no market
bill gross is fighting the fed, don't fight bill gross?
the market is told what it believes, but who is telling the market what to believe, the people who manipulate the market?
three strikes yurrrrrrrrrrr out
Treasuries are probably still the broadest, deepest, most liquid market out there. That kind of market is efficient, I hope!
the ultimate bubble is treasuries
there is no hope
Here's where you are wrong.
Market efficiency as a theory doesn't work because of the crimminal cabal running Wall Street. Its not a theory, its a hypothesis at best.
Oh, took me a minute to get it but this article was not intended to be serious. Almost had me there! haha
Ding!
(Harry Wanger wrote it.)
Don't fight the Fed.
You got that right brother.
+1
Gross is going to get his ass handed to him if he tries shorting, he may do it for a very short time to make a point but he will play along.
I'd offer two additional reads:
Robery Wenzel's
http://www.economicpolicyjournal.com/2011/04/how-fed-buying-of-long-term...
And
The FRBSF
http://ht.ly/4xKB5
I think what's missing here is the important new policy "tool" that Wenzel points out: the Fed is paying interest on reserves held at the Fed. There is the potential for the Fed to go cash flow negative. As silly as this sounds (and please I understand Fed liabilities are money), in the event short term interest rates do increase, the Fed has a simulataneous decrease in their mark to market bond portfolio and increase in the cash out for payment of money on reserves. If they Fed sells the bond portfolio in order to raise cash (again, WTF), they push the short-term rates up even higher and exaserbate the already cash flow negative scenario with increase interest paid on reserves.
I think the Fed will likely hold on to the bond portfolio, but reduce its redemptions paid to the Treasury Department, thereby causing an increase in bond issuance by the Treasury department. Pushing up rates.... And the Fed will be forced to activate another round of QE in order to takedown the additional treasury issuance.
They are in a print or going bankrupt scenario. The bankrupt scenario is for the Treasury or IMF to nationalize/bailout the Fed.
@PragmaticIdiot
The idiot part of your name is appropriate. You can't have #1 if you believe in #3.
Not necessarily mutually exclusive.
The fed takes great pains to let its intentions become widely known(variables).
The fed being the owner of the currency can control the supply of money or the interest rate, but not both simultaneously at least not for long!
It is not possible to fight in the aggregate against volume changes in money supply that accompany a given interest rate policy and vice versa but transmission is not instantaneous. The market is efficient within those parameters controlled by the fed.
That's what my hubby told me: "Tell me what to do, or how to do it, but not both."
I don't get him sometimes.
Black Lotus Street Peddler: The only snakes I know of are those of GS and their cursed bankster friends. Their evil has spread to every city. Two or three years ago it was just another snake cult, now... they're everywhere. It is said that they are deceivers... they murder people in the night... I know nothing.
Pragmatic is wrong. There is absolutely no reason the game cannot and will not end now. Besides that expectation theory is way overrated and is merely conjecture at best. L
Ok, expert dudes, what happens to bank reserves, interest rates, equity markets, the carry trade, t-bond demand if five jumbo jets simultaneously crash into the Federal Reserve on a Monday morning? And this is no black swan. Violence and revolution are "endogenous" and a necessary reaction to state-monopoly capitalism.
Ah, 'epic win'?
Weak
double post
Junked your double post, for you not having the patience to wait for the first one to load.
I junked because Reese Bobby's picture's a little dark. Ricky Bobby would have done better.
New name, same painful thought process.
1. Efficient markets? Is that a joke or are you an Ivy league PhD?
2. Could rolling the near-term maturities require a higher rate?
3. On this you are right and wrong. They will continue to inflate and debase. By continuing QE indefinitely, (sorry ZH).
The #1 non-Fed buyer of UST's, China is sick of our crap. The #2 buyer, Japan is a tad short on liquidity.
There is no end to QE until the banks lose control of our Country = never...
As TD posited correctly.
"the primary reason why the Treasury needs the Fed to be the buyer of only resort is that no matter what happens to interest rates, and cash outlay to the Fed ends up being a revenue item for the Treasury! In fact, the higher the rate, the greater the purported revenue from Ben Bernanke, even though in reality it ends up being a wash transaction."
http://www.youtube.com/watch?v=8iyDZBAFxKE&feature=watch_response
The wash transaction is the bones being scraped from inflation to Consumers who are decimated. For me and my Household ebit is 10.5 lower. This next wave washing over us is devastating. Even being able to cope with the ensueing commentary we seen from 2005 floor testamony the urgency is pointless for those now being crushed. The so called support mechanisms will be blow outs of the remnants. We constantly warn off the back wall to come. The grass roots fear is just starting to peak and since we who have been trying to preserve Capital still must wait for the final assault. The point is there is no normaly bias. Dig in for the haul since then it was forwarded that the twenty dollars that was given to me for my mule is what saved my life. The analsysis here is stunning and forgive a fool watching his nation die.
Tyler Durden is not above criticism but lets be honest he is the freaking man. I know I have gained alot from Zero Hedge. If I ever have more than a pot to pee in I will gladly support this site.