Via 'Lucas Jackson',
Fed Creates A New $4.25bn Asset Manager Every Business Day in March
There is ample debate going on in the market right now about the long-term effects of the Fed’s seemingly never-ending QE. The well-respected Stanley Druckenmiller was on CNBC this morning defending his recent commentary that the mal investment currently being instigated by the Fed can only end poorly. The counter-point was provided by former Fed governor Kevin Warsh who in his best status quo pleasing way essentially said Bernanke is in charge and all is well.
Perhaps it is, perhaps it isn’t. Personally, in the debate between a Fed governor academic and a man who successfully managed billions of dollars for decades, I’ll put my money behind Mr. Druckenmiller any day of the week and twice on Sundays!
But I’m not smart enough to know what will be the result of the Fed’s latest monetary experiments. Perhaps all will be well. Perhaps the magical money multiplier really works and is higher than anyone thinks? Perhaps the wealth effect is just about to kick in. Perhaps inflation really is low and muted, as Bernanke keeps repeating. Perhaps housing is recovering despite a continuing decline in real wages. Who knows? I don’t.
But one thing I do know is that the Fed’s hands are all over markets today. Consider for a moment the current QE program.
QE aka Money for Nothing
In March, there are exactly 20 business days. Also in March, the Fed will commit to purchase via their Permanent Open Market Operations (POMO) approximately $85bn in securities from the TBTF primary dealers. The $85bn in cash (not real cash but actually 1s and 0s in an electronic account) didn’t exist on the world’s ledger in February. However, yesterday at the Fed some functionary sat down at a computer, went into one of the Fed’s POMO accounts and entered the numbers 85, followed by nine 0s. Suddenly, the world had an additional $85bn. It doesn’t exist and then POOF! 11 key strokes later and it exists.
Over the course of the next 20 business days in March, the Fed will take this newly “minted” money and buy things with it. This new cash now enters the system and starts chasing other assets almost immediately – otherwise it sits in cash earning a negative return, something Bernanke is very actively discouraging.
The net effect of all this is that on average, every business day in March will see the Fed effectively seed a new $4.25bn AUM investment firm whose sole goal is to buy, not sell, securities. Think about that, out of thin air, a new $4.25bn competitor is starting up each and every business day in March, courtesy of the good folks in the Marriner Eccles building in DC.
Some of you have worked in asset management your entire careers. You know how hard it is raise assets. You know how long it takes and how important it is that your investors know that you can both buy AND sell assets effectively in order to earn their business. You know how hard you must work to study your markets, sectors and companies to be able to understand the fundamental drivers.
It must be hard to sit by and watch while the Fed creates a new $4.25bn competitor every business day where the sole goal of that money is to buy simply because a Princeton academic thinks it should. The Princeton academic thinks stocks should be high, so they are. The Princeton academic thinks bond yields should be low, so they are. Period. Of course this makes a mockery of those of you who actually try to understand fundamental value, but hey, the Princeton academic gets what the Princeton academic wants. The devil take the hindmost.
Again, I gave up long ago trying to predict how the massive manipulation currently being conducted by the world’s central banks will end. However, I do know that what the Fed is doing now – essentially creating a $4.25bn asset manager every business day in March 2013 – is unsustainable and certainly unfair to those of us who actually work for a living.
And what is unsustainable and unfair in the long-run does not last.