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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.
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How would the Fed prop up the treasury market without some form of QEx?
Is the premise that paper will have more than the value printed upon it in 5 years factored in?
Utter nonsense. That's not how the market works.
It was certain that quite a few of the dot-com companies were completely worthless and amounted to two guys in a room with a web server, a bad website, and a preposterous business plan. That didn't stop them from getting billion-dollar valuations and then being shot to hell a few years or even months later.
The market factors things in eventually, but often takes its sweet time doing so, and postpones the obvious until it has no other option.
The Fed will try to find a way to do this, yes. Whether or not it has any viable options at the time is another matter entirely.
There is one force stronger than the Fed, and that's the force of basic arithmetic.
It doesn't matter if you're a king, a President, or a pope. If you get in a fight with math, you will lose, period.
"It was certain that quite a few of the dot-com companies were completely worthless and amounted to two guys in a room with a web server, a bad website, and a preposterous business plan. That didn't stop them from getting billion-dollar valuations and then being shot to hell a few years or even months later.
The market factors things in eventually, but often takes its sweet time doing so, and postpones the obvious until it has no other option."
+1 Amen.
The market looks at variables and prices accordingly in the timeline. However, I would argue that with better HFT algos the actual time/commit is shorter.
"What does a politician telling the truth, the federal reserve pausing from money-printing, and Tyler Durden being wrong have in common?"
Wishful thinking, but not true.
It's all about liquidity, no POMO, liquidity cut by 75%, you do the math.
I am with Tyler and Bill Gross on this one.
The great 30-year bond bull market is over. Interest rates have bottomed.
Yea but.
If this is the case how will Mr. Ponzi pay back the original investors?
I agree that bonds have probably put in a bottom. I disagree that bill gross's market timing will add alpha over the next few months.
The inaccuracy is your incompleteness - no legitimate discussion of what's priced in to expectations can ignore QE3 (or lack thereof).
He forgot to mention that he bought some of PIMCO's offloading (8-roper that Gross sent all over Bernanke's face).
The biggest issue of course is "why are we in a bear market in bonds when the Fed is monetizing?" That strikes me as "not modeling out too well at the Control Center." Other than that "mighty big pile of ointment" I'm very much on board with this analysis. I'm only guessing but it stands to reason that "the plan with the bailouts was to get the private banking system back to health as quickly as possible" so that "there actually would be an American buyer of American debt." Unfortunately we got "never let a crisis go to waste." Can you say "counter-intuitive"? And so here we are...you and me...staring across the dinner table...the kids not saying a word...again...ready to....
Okay, how about yields will rise until Qe3 or what ever they call it, arrives, because demand is already diminishing. The end of pomo will just exacerbate the disinterest.
Hmmm.
Markets forward looking - like, say housing, MBS, etc.? Like 2007? Like 2000? Markets chase alpha in the nanosecond. Long term is a day or week out...a quarter out is eternity. Underperformance is all Wall St. cares about.
Fed will roll - Yes, Fed will never be able to stop rolling their T's and most everybody elses for that matter.
Don't fight Fed - Fed creates massive booms / busts. Agreed booms are to be endured and busts are to be celebrated ("fuck the Fed"???). Current boom nearly run it's course now that inflationary pressures threatening to destroy economy and now we get the deflationary bust. Only way Fed can conjure some T buyers is the equity bust. The moment Fed stops the ponzi the T market at higher interest rates create will create a black hole sucking in money from all other assets. Getting ready now.
Not sure where in any of that Tyler is off base?
+1
Translation of the OP: appetite will not plunge and yields will not skyrocket, because the Fed will monetize. Your response, yes, but...there will be an unavoidable equity bust. I think the OP would argue that no equity bust is necessary, because the Fed will conjure up buyers by just monetizing.
So what are the real world restrictions on monetization? Suppose there are no buyers, from a flight to safety or from any other source (ie, Asia), and the only buyers for any bonds, anywhere, are central banks. When we reach that point, that what are the real world restrictions that will reign in the Fed. Politicians? Weimar mode?
They will try to destroy the PM market, claiming it is a bubble they cannot allow to continue. They will try to confiscate 401ks claiming they need to be invested as the government sees fit. There are so many stops ahead that we can all look forward to with joyful anticipation.
Joyful anticipation is all about the 2012 election.
So what are the real world restrictions on monetization?
Technically none.
But in a practical sense a collapsing dollar would motivate the monetizer to curtail monetization ...assuming they care about the dollar's value ...which they apparently don't.
It's hard to see how upset the Fed would be with a collapsing dollar. The entire planet is awash in dollars. Every other major competing economy suffers with a collapsing dollar. If the dollar collapses, pain all 'round, and I think the long-term thinking is that the US still has the size, population, and resources to weather global long-term depression better than any of the rest of the industrialized world.
In a way, the sooner the global system collapses, the better, because we currently still retain a mostly functional civic infrastructure. No guarantee we'll have that in 2016.
just like housing, there will be a market with a price above 0 if and when they step away. it is just a matter of the government not liking the price level that will be determined by the market. At a 6% short and a 12% long bond what happens to deficits? The political pressure to defund non-essentials?
Except that QE3 is priced in or the whole ponzi implodes in cascading cross defaults. Sorry, but in your infinite smugness, you missed that bit.
Technically QE3 is not priced into the yield curve. Roll and carry are probably worth 100 to 150 basis points over a one year period and futures a pricing in 100 to 150 of policy tightening over the next 12 to 18 months. "Policy" needs some polishing since each $100 million or so of QE is equal to about 25 bps of policy. There is a pretty good argument that absolute size of the Fed's balance sheet isn't as relevant as the change in the size of its balance sheet. If you buy that argument, maintaining its balance sheet size is equivalent to a withdrawal of stimulus (in this fucked up world we live in).
The curve would flatten if QE3 became priced in. I don't think its a change in monetary policy that would drive buyers out of the TSY market. It's the reckless fiscal imbalances that will ultimately drive buyers out of the TSY market and the dollar. But that's not happening in June. I also don't recall any post here predicting that.
Stocks on the other hand... Those bitchez have QE37 priced in.
But then again, no one thinks the equity market is rational/sane. It's a bunch of spreadsheets battling each other in a quant War Game. The New Norm in equities is, we can't explain why equities are forecast to have an annual expected return of 8.5%... So rather than argue about it, we'll let the spreadsheet trade for us. I really don't get equity people. It probably has something to do with the fact that long only equity managers want good absolute performance so they default to a bullish position. Because the trade in fixed income is so asymetric, the default option is bearish. When equity guys can't figure things out, they default to bullish, and when bond guys can't figure things out they default to bearish, hence the curve is steep, hence no QE3 in treasury prices.
You're exactly correct, Kurt. Excellent observations.
It seems that Unca Ben has decided not to concern himself with exactly who is going to buy Treasuries when his words, "I told you so," resonate through global equity markets over the mid- and late summer. It doesn't matter to him because he knows someone will.
Once they start to figure it out and the markets are allowed to self-adjust, the sell-off in equities will correct to the mean and probably accelerate well beyond, leaving a lot of bag-holders sweating bullets and seeking a flight to safety.
It is also a way for the Fed to keep steady the size of their balance sheet, effectively removing stimulus that way, as you say, while having a minimal effect on real bond prices. In that way, too, yields will not move so much as the Fed takes the dreaded "hyperinflation" scenario off the table.
Get long US dollars, not dollar-denominated equities. Definitely wouldn't want to be long Hong Kong equities or Ozzie dollars, either.
It is a win/win for Dr. Bernanke, with the Fed sailing in the sweet spot.
:D
This article only highlights one point :
ZH, as usual lucid in its market analysis, sees the mega trend, momentum, of the giant ongoing ponzi. What the article highlights is that we ARE ALREADY in non-efficient market mode. We are already in OLIGARCHY decision making, where market efficiency, macro economic reasoning , is MERE facade. The Oligarchs have ALL the financial power within the corridors of the so called market economy. They will continue to manipulate it ad nauseum, knowing the key COUNTER players in the world financial game don't have an alternative strategy : the EU/CBE is in the same boat as is BOJ/Jap government. China's money is pegged to USD, the US market still its main export outlet and its own economy under threat of hyperinflation blow off (controlled by world Oligarchy monetary play) and RE upcoming bubble. Along with resultant potentially extreme internal social trouble. So FED has time to play its monetary sleight of hand for a few more years. THAT IS THE ONLY GAME PLAN TODAY IN THIS SHIT HOUSE OF VIRTUAL DIGITAL MONEY BUT REAL POLITICAL POWER.
So ZH being right in terms of free market logic is irrelevant within the TIME FRAME to which Ben and the FED execute their current shenanigans of can kicking. In the longer term...as ZH knows so well...
Regarding whether Tyler and ZH are "right" about some foreseen scenario, I say who cares? In markets as jacked up as these have become, it is only an educated guess, much more educated in that arena than my guess is.
I do have to go along with Bill Gross here, though. The Total Return Fund is flat USTs, not short! Gross never said that he was shorting bonds (I don't think...) but instead said that the great bull market in bonds is over. I think he sees the bond market just sailing along, doing nothing, so he had better put his money to work somewhere more efficient.
_______________
They have been in "oligarchy mode" since the fall of 1963 but I have a feeling the scheme is running its last legs. It was most effective while it lasted, though, that much is sure. All those guys are getting old and are ready to pass away, leaving the younger ones to scramble for position.
I look to them to start eating their own, which will threaten the fabric of their matrix, exposing some powerful people to the whims of selective justice. There are some people who know too much to be simply cast aside.
Take, for example, the investigation into the structured products offered by the JP Morgue. Never heard of this guy Llorda but he seems a big enough fish to start squealing if the heat gets to be too much. http://www.zerohedge.com/article/here-comes-abacus-v-2011-former-head-jpms-structured-products-desk-be-charged-securities-fra
I would expect the oligarchical ponzi to begin unravelling in this way. Hopefully, we will have some enterprising journalists willing to take that Pulitzer-winning ball and run all the way to the bank with it.
Either way, there is really only so much the Fed can do and they have, until this point, played their cards perfectly and have all their ducks in a row to crash the global economy at will (read: China...), while protecting the United States and Great Britian from a terrible time. That's where they will use and manage a flight to safety for USTs. They will be the one steady rock in the investment world that investors will cling to in the coming hard times.
It should be very interesting to watch them pull off the final gambit.
+1
+1
"Except that QE3 is priced in"
Bingo. Except that if there is enough of a time lag between QE2 and QE3, there will be a comic interlude.
Precisely. In fact, there will be a lag between QE2 and QE3. Just enough to set the stock markets into a panic and get every fool on Wall Street and Congress begging frantically for Monetizations 3--7. Or 10.
That way, Bernankster can say, "Hey--Every one of you demanded it. So don't whine about 2300% inflation."
I think you're right.
We know the whole ponzi will collapse without QE. But the concommitant inflation is beginning to worry the sheep. So TPTB need to engineer a crash to get the sheep on board again - "look what happens when we stop QE!"
In the mid- to long- term I'm long gold, silver, oil, and everything else, but it makes sense to me that our masters will do their best to crash everything to set the inflation clock back and give them political cover for more QEsings.
termination date of QE2 priced in.... right, like Japan clusterfuck is priced in already.
I love zero hedge and I love Jim Rickards, same team boys....
Tyler, any response ?
Yes.
In fact the author provided the response: "The maturity profile of the Federal Reserve`s assets is irrelevant"
Furthermore, we would be delighted to see where in our "frothy" linked post, does the author find that Zero Hedge argue "that, upon the conclusion of QE2 POMOs, appetite for U.S. Treasurys will abrubtly plunge and send yields sky-rocketing." In fact, we urge the author to quote from the post.
Perhaps the author is left with the impression that Zero Hedge runs the Total Return Fund and orders Mohamed El-Erian to write a twice daily op-ed on this and that...
Lastly, for an argument which claims the math in our analysis (here) is wrong, we fail to see a single doublt digit or higher number in this post.
I believe it was your article sunday? Where we criticised your knowlwdge of macroeconomic theory. In that discussion of the end of qe2 one of the tylers said that it would end with yields dropping and a.hyperinflationary.spiral or just a hyperinflationary spiral.
Sorry, is "macroeconomic theory" the same as "market efficiency"? If so, please advise where to join in the criticism?
"Macroeconomic theory" is what is taught at Hogwart's.
Market efficiency is more akin to what Santa's Elves do.
I went to Hogwarts, you know...
to study bond markets...
Me and Ben partook of the same potions,
except mine eventually wore off.
I meant to say bonds dropping not yields dropping. But we still love you. No one is perfect.
There is a reason why this post was put up earlier:Primary Dealer Publicly Disclosed Holdings Plunge To Lowest Since February 2007
I dont understand what you are saying. Could.you elucidate?
3rd RULE: If someone says "stop" or goes limp, taps out the fight is over.
Are you limp, or just tapping out?
And for those unfamiliar with Stone & Mcarthy, they are one of the most highly respected and unbiased firms in institutional fixed income research.
what, you mean they do ... research.... wow.
did that apply to CDO's as well?
if that was sent to our friend sgs, he would be at the guys house and invent about 20 new variations form the latin word fuck...than eat his dog...
if reading you is wrong, i don't want to be right
citations please
Prag,
You Fucking Dickwad, AssHat, ScumTroll,... Shut your Pie Hole!
ZH has more intelligent members than Prag....xxx. Wanna debate bitch!
The irony, the irony. (Kernel Kirtz)
"Markets are forward-looking and are not impacted by known variables (also known as market efficiency)"
I lol'ed and stopped reading here.
exactly, the author is a free market tool, i mean fool.
the invisible hand will buy all the debt...don't worry sheeple...