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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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now that everyone has embarked on a currency race to the bottom, there are ample buyers for these securities and by that I mean sovereign wealth funds. They create money from nothing and buy something that might default yielding even one percent on the dollar and that is a very good deal.
We need a gold standard, it is your only protection and then you need to plan for your taxes.
Ditto.....because our current stock "market" is not a market at all, and there is no true price discovery of anything.
Don't Fight the Fed
This was a truism when the backstop of the Fed was the world's largest creditor nation.
Now the Fed's backing is the world's largest Debtor Nation; and growing exponentially.
Hour by hour, day by day, the U.S. is slipping into the abyss.
The Fed may well have the world's biggest printing machine, but the nation cannot afford the maintenance.
How does one cite in an opinion piece?
the same way Tyler does
I see the trap I set yesterday must have malfunctioned
And this article was a trap that functioned perfectly. The purpose of the article was not to argue a point, but to draw attention. It worked flawlessly.
If the author really wished to make his case he would have either expanded on his three points so that they would withstand more than a casual examination before falling apart or he would have cited outside sources of information that would do the job for him. Since he did neither but instead just threw a match into the gun powder room, the purpose for his actions can be deduced quite easily.
Lights, camera, action. **BOOM**
Cognitive Dissonance : You are wonderful.
Man in Black: Thank you; I've worked hard to become so.
Cognitive Dissonance : I admit it, you are better than I am.
Man in Black: Then why are you smiling?
Cognitive Dissonance : Because I know something you don't know.
Man in Black: And what is that?
Cognitive Dissonance : I... am not left-handed.
[Moves his sword to his right hand and gains an advantage]
Man in Black: You are amazing.
Cognitive Dissonance : I ought to be, after 20 years.
Man in Black: Oh, there's something I ought to tell you.
Cognitive Dissonance : Tell me.
Man in Black: I'm not left-handed either.
Cognitive Dissonance : My father was slaughtered by a six-fingered man. He was a great swordmaker, my father. When the six-fingered man appeared and requested a special sword. My father took the job. He slaved a year before it was done.
[Shows the Man in Black the sword]
Man in Black: I've never seen its equal.
Cognitive Dissonance : The six-fingered man returned and demanded it, but at one tenth his promised price, my father refused. Without a word, the six-fingered man slashed him through the heart. I loved my father. So naturally, I challenged his murderer to a duel. I failed. The six-fingered man left me alive, but he gave me these.
[strokes the scars on his cheeks]
Man in Black: How old were you?
Cognitive Dissonance : I was eleven years old. And when I was strong enough, I dedicated my life to the study of fencing. So the next time we meet, I will not fail. I will go up to the six-fingered man and say, "Hello. My name is Inigo Montoya chju keell my faderr. Prepare to die."
..not to mention the pathetic short length of this "article". A good number of ZH'ers frequently post more in depth analysis in the comments section of posts.
Hey Pragmaticidealist -- you're not 'wrong'. You're just light-weight and irrelevant.
Popo he's wrong. If he was right there would be no need for intervention in the first place...
The fact that the subject matter even exists proves he is wrong...
I agree.. I put more effort into creating math worksheets for my 6 yr old daughter the past weekend.
The fact remains, who is going to step in and buy these treasuries?.. I don't give a rat's ass who is already anticipating the FED's pulling away of the punch bowl.. It's immaterial..
Max, the length of the article is irrelevant and no citation is needed. Even were it twice as long it would still be incorrect. If it was correct there would be no need of Fed intervention in the first place.
There will be QE3, 4 & 5 - and more because the system requires it. Whether there is a pause between easing is irrelevant... The system requires it.
Sovgereign funds can step in buy them all, but if you were a fund manager would you rather buy at 2 or 3% yield, or 10?
"ack." Ibid.
@disabledvet
thank you that cracked me up so much!
http://www.youtube.com/watch?v=btgteZu9VNc
weight of the world....
Man in Black: All right. Where is the poison? The battle of wits has begun. It ends when you decide and we both drink, and find out who is right... and who is dead.
Vizzini: But it's so simple. All I have to do is divine from what I know of you: are you the sort of man who would put the poison into his own goblet or his enemy's? Now, a clever man would put the poison into his own goblet, because he would know that only a great fool would reach for what he was given. I am not a great fool, so I can clearly not choose the wine in front of you. But you must have known I was not a great fool, you would have counted on it, so I can clearly not choose the wine in front of me.
Man in Black: You've made your decision then?
Vizzini: Not remotely. Because iocane comes from Australia, as everyone knows, and Australia is entirely peopled with criminals, and criminals are used to having people not trust them, as you are not trusted by me, so I can clearly not choose the wine in front of you.
Man in Black: Truly, you have a dizzying intellect.
Vizzini: Wait till I get going! Now, where was I?
Man in Black: Australia.
Vizzini: Yes, Australia. And you must have suspected I would have known the powder's origin, so I can clearly not choose the wine in front of me.
Man in Black: You're just stalling now.
Vizzini: You'd like to think that, wouldn't you? You've beaten my giant, which means you're exceptionally strong, so you could've put the poison in your own goblet, trusting on your strength to save you, so I can clearly not choose the wine in front of you. But, you've also bested my Spaniard, which means you must have studied, and in studying you must have learned that man is mortal, so you would have put the poison as far from yourself as possible, so I can clearly not choose the wine in front of me.
Man in Black: You're trying to trick me into giving away something. It won't work.
Vizzini: IT HAS WORKED! YOU'VE GIVEN EVERYTHING AWAY! I KNOW WHERE THE POISON IS!
Man in Black: Then make your choice.
Vizzini: I will, and I choose - What in the world can that be?
Man in Black: [Vizzini gestures up and away from the table. Roberts looks. Vizzini swaps the goblets]
Man in Black: What? Where? I don't see anything.
Vizzini: Well, I- I could have sworn I saw something. No matter. First, let's drink. Me from my glass, and you from yours.
Man in Black, Vizzini: [Vizzini and the Man in Black drink]
Man in Black: You guessed wrong.
Vizzini: You only think I guessed wrong! That's what's so funny! I switched glasses when your back was turned! Ha ha! You fool! You fell victim to one of the classic blunders - The most famous of which is "never get involved in a land war in Asia" - but only slightly less well-known is this: "Never go against a Sicilian when death is on the line"! Ha ha ha ha ha ha ha! Ha ha ha ha ha ha ha! Ha ha ha...
Vizzini: [Vizzini stops suddenly, his smile frozen on his face and falls to the ground dead]
Buttercup: And to think, all that time it was your cup that was poisoned.
Man in Black: They were both poisoned. I spent the last few years building up an immunity to iocane powder(helps against radiation to0).