It has been well known for years that PIMCO's Dr. Jekyll and Mr. Gross, the original bond king in charge of Allianz' $1+ trillion bond portfolio, has been a vocal critic of QE even in the face of his daily tweet barrage, which often recommends positions in complete contradiction to what said king opined on in his expansive monthly essays. What will come a great surprise, however, is that the "other" fund, which is just as big, is run by Wall Street's shadow king Larry Fink, and which has been advocating to go all in stocks for over a year (preferably using ETFs) interim drawdowns be damned (after all everyone by now should have an infinite balance sheet) - BlackRock - just went all out against QE.
As the FT reports, BlackRock's fixed income guru, formerly at Lehman Brothers, Rick Reider, "has called on the Federal Reserve to rein in its programme of quantitative easing, saying its bond-buying tactics are a “large and dull hammer” that have distorted markets and risk stoking inflation." Why, it is almost as if we wrote that... Oh wait, we did. Back in 2009.
However, unlike opportunistic others, we did not wait until the moment was juuuuuuust right to present the truth to the world. Either way, it is refreshing to see that one by one, virtually all the biggest money managers in the world are slowly but surely turning to our way of thinking.
From Rieder via the FT:
Rick Rieder, who oversees $763bn in fixed income investments for BlackRock, spoke out as the Fed debates how long to persist with the unorthodox measures it has used to stimulate the US economy. His comments add BlackRock to the growing list of Fed critics who are warning of trouble ahead for the bond market.
Mr Rieder favours government debt that matures within five years, corporate and emerging market debt, and bank loans that offer floating interest rates.
“Fed policy has had a distorting effect on capital allocation decisions of all kinds at virtually every level of the economy,” he told the Financial Times. “It is a very large and dull hammer for markets.”
Rieder's warning will be largely ignored by the FOMC, which knows very well that even the tiniest hint of a slowdown in the Flow (because the Stock is and has always been irrelevant), will bring the market to a quick and violent death.
Mr Rieder said the Fed had a window to cut back its bond-buying now. “The economy is on a reasonably strong footing,” he said, even as unemployment remains at 7.6 per cent. “The US labour market faces an array of structural headwinds that are likey to only be overcome in time.”
Those structural problems include: the costs of healthcare and pensions, which encourage the hiring of part-time workers; skill shortages – “people are not fit for the jobs available”; and demographics – “as the population ages, more and more people are staying in the workforce”.
Finally, Rieder does some back of the envelope math:
BlackRock estimates that interest rates on 10-year Treasuries are about 100 basis points below where they would be normally. Mr Rieder said that as such interest rates normalise, “losses that occur to fixed-income portfolios will be more and more acute”.
Right, because markets are so rational and discriminating when it comes to assorted XLS and DSGE models, and never tend to overshoot on either direction, especially when the only buyer of last recourse, the same buyer who has bought some 80% of net issuance in the past several years decides to go away, and no other clear buyer steps up. So yeah: take that 100 basis point and multiply by 10 or more to get the true impact of what will happen when the Fed steps away, and why Paul Volcker better be on carbonite duty for the moment he has to be thawed when America looks back at the 15% inflation of 1980 as a hyper deflationary period.
As for BlackRock's warning: it will come and go, and nobody will pay attention, because unless Goldman and JPM which together chair the Treasury Borrowing Advisory Committee say "enough", nothing will change. And since bonuses at both banks rely more than ever on the Fed's outright monetization of anything that is not nailed down, don't expect QE to end. Ever... and certainly not as long as the US central bank is still in charge of the entire world.