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Turning A Donkey Into A Butterfly
The clear message from the doctors this week is that they plan to keep administering the pills, in larger quantities if necessary, until the donkey turns into a butterfly. Citi's Matt King reminds us though that they failed to mention the associated risk that the donkey dies of the side effects first (apart, that is, from Dr Osborne, who urged the other doctors to ignore any such possibility entirely). For investors, King notes the immediate implication is that the central banks would like the party in any and all risk assets to carry on. This raises the spectre of a rally back to 2007 valuations, made all the more dizzying this time by the lack of any accompanying justification in the state of the economy...
Via Citi's Matt King,
Party Like It's 2006
...[ interest rates] are the one asset class which is at least following fundamentals. Both extra central bank liquidity and poor economic data contrive to send yields lower.
It feels a lot like the environment last year. In theory, lower yields and the threat of negative deposit rates are supposed to spur lending. In practice, they aggravate the hole in pensions, and exacerbate an already self-reinforcing cycle in which the premium on ‘safe’ assets merely serves to highlight the riskiness of the overall macro picture.
The only difference between now and then is the way in which the ECB has succeeded in getting peripheral govies reclassified from 'risky' to 'safe', regardless of their fundamentals. The effect has been strongest among peripheral banks, who have clearly decided that the best way to make use of abundant liquidity is through large increases in their government bond holdings. Other investors have consequently been forced to follow suit.
Credit, sadly, is just a passenger in this story. One reason the rally has proved so painful for many investors is that it has been so exclusively concentrated [in the most obviously risky instruments and entities]. And yet if those [positions] continue to rally, it remains easier even now to squeeze the remaining shorts than it is to force any reduction in the real risk positions out there.
Had all this been accompanied by any substantive improvement in economic prospects and underlying sovereign and corporate solvency, it would have been worth it. But of that there remains precious little sign. Despite the system being flush with liquidity, actual lending to non-financial corporates is contracting. Even if some degree of unprecedented risk-taking by the ECB or BoE manages to reignite such lending, the obvious riskiness of the environment means that the temptation for corporates and banks is to take advantage of the liquidity to engage in financial engineering of one form or another – not to do anything rash like actually hiring people. Even Apple, presented with the option of virtually free cash and at the forefront of technological innovation, seemingly can’t think of anything better to do with it than to give it back to shareholders.
For investors, the easiest option here is to capitulate. The mad scramble to sell protection on the [credit] indices, reflected in record negative skews, and the steady reduction in interest in tail risk hedges, even as we have rallied, suggests that many have been doing just that. We expect more to do the same in buying the wave of IG and HY issuance that is slowly but surely materializing – not to finance economic growth, but as corporates re-engage in M&A and share buybacks, and private equity do the only rational thing and take advantage of record low yields to line their (and, to be fair, their investors’) pockets through dividend recaps.
And yet we have played this game before, and it does not end well. Ideally at some point the central banks realize that the donkey is just a donkey, realize that their sole focus on their inflationary (& employment) mandate is blinding them to the risks of asset price inflation, and re-emphasize the limits on their powers and the necessity of bigger reforms elsewhere. This week suggests such a point is not particularly close. Alternatively they drive the donkey off a cliff to encourage it to fly, and at some point investors look down and recognize that many of the things they have been buying are far riskier than they thought.
Investing in such an unpleasant environment is fraught with difficulty. For now, the lack of obvious immediate catalysts, the shortage of assets to buy, the short-term focus of investors and the encouragement of the central banks make it likely that it this still 2006, not 2007. And yet the point of looking down will almost certainly be impossible to identify in advance, and may well not take as long as it did last time.
To paraphrase a certain former CEO, when the central bank music is playing, investors are compelled to get up and join the party. Yet we know how that one ends...
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a Burrofly
Ben has been lucky.
He has some control over US interest rates. He has much less control over equities, muni bonds, and foreign markets.
Look for the first sign of a break abroad, unless Cali goes tits up, which it should, soon.
this is all a fake balance sheet ponzi..
Mexifornia, Illimex and Neuvo York will always be OK because of the Feds.
somewhere.. at some time .. some little unforeseen balance sheet move will provide sufficient perturbance to upset the apple cart.
Manthong! We all KNOW indeed that this is a big shameless PONZI scheme. Obama's officials are saying it aloud in the hallways. That is not the point. The point is when will it end and how? After how much damage in inflation or deflation of assets? The author says that it is probably going to be unpredictable and I fully concur, using chaos theory mathematics. One of the few things that we know is that when it starts it will go too fast. Only the HFT will be able to get out in time, they are running algos that will allow them to see a few miliseconds into the future and will detect the rate of increase of bifurcations in the market. But it will be tough even for them. For the rest of us mortals, if it finds out in the market it will be over. Circuit breakers will stop trading and it will be downhill from there. Due to the level of leverage, margin calls will start, shorts will immediately start selling naked and all hell will break loose...
Therefore the point for all of us, is for how long do we dance around the fire? Now that we know that there is only one chair left (reserved for HFT algos). We could buy gold and seat tight. The risk being that we may loose a doubling over of the dow and S&P (doesn't matter if it is fake or not), it could happen if B goes bananas as he says he will. Up to know he has proven that he is willing to double and double his bet with no limit whatsoever, thus I am inclined to say hedge your bets and if you have made money in the market start selling on the rallies and only buy half on the dips. But be ready to sell on anything larger than a 2% drop, don't ask any questions, just sell. The way to do it is to set a conditional order based on the level of the SPY and if it goes down more than 2% trigger a limit order to sell, but make sure that your limit is at least 3% below the triggering SPY level since the market could drop like a rock. DO NOT set up a market sell. A limit sell order will not protect you either, the market will run through it like a knife. i.e. if you set a limit sell at SPY 157, by the time your order executes the market price will be below your order and it won't execute. If you set a limit market order, you risk being sold at ANY price, even at 100 or lower since you said "MARKET". So your only choice unless you are a professional is to use the conditional order triggering a limit order with a limiit much lower than the trigger. That will execute but no lower than your limit, unless the market is halted, if it is you are out of lack... and you should've gotten out sooner...
Until next time,
Engineer
Got the last one wrong, it's Jew York!
He can drop the dollar bills, but he can't control where they go.
Manthong,
.
Hip Hug Her -- Booker T. & The MG's (in HD)
http://www.youtube.com/watch?v=uJbjke7Ps2Q
Barfly (1987) {full movie ~1hour, 40 minutes}
http://www.youtube.com/watch?v=3IrI-O91y0w
great tune.. they don't make'em like that anymore..
the flick.. to check out one of these days ..
but.. one of the best .. http://www.youtube.com/watch?v=9pYux5-d1Es
bass riffs to die for.
Hang Osborne from a lamp post in Pall Mall - the Eton cunt..
C d O,
Are we sporting some Falklands Envy..?? I know, I know...Maradonna was better than Pele and the "Hand of God" was a legit goal..
I am surprised that they do not include in their inflation equation the increase in Stock prices. If the did inflation would be well over 10%.
I am surprised you are suprised
One of, if not the main component used by Bernankie to calculate inflation is wages.
Dammit buy high, sell lower!
Do it now, Da Boyz are depending on you ;-)
But, but, but,.......I'm waiting for the fucking dip.
Maybe if I turn this chart upside down.............
Ah, there we go!
lol...its all about ones perspective ain't it, fleece em comin & goin ;-)
It's a donkey show.
It's donkeys all the way down.
If you go to a donkey show and you don't know who the donkey is... you are not the donkey...
No, no no, don't look at the stocks charts, that is why you are not seeing the dip, look at the commodity prices, when they hit bottom, buy them, if you have to buy stocks of companies that hold/mine/produce commoditities, buy their preffered shares!!! Forget about buying paper on a dip... will stay worthless or almost...
Until next time,
Engineer
We have not played this game before. Central banks are buying stocks. Does Matt think pensions are not? There is only one way to plug that ZIRP gaping hole and that is to jump into stawks and ride the market into the sunset.
The term bidless market is going to be the understatement of our history when it occurs....sometime in 2036.
I remember you're talking about insurance and pensions here on ZH. Now everybody in the MSM is talking about it.
ekm...man I feel like the stuff I read from you and others is truly enlightening, and a lot of it seems to come from good people that have a moral compass. I hope we are rewarded for having foresight and trying to get the word out. I really do.
"Ultimately investors must choose sides. One side—the wrong choice—is a seemingly
effortless path that offers the comfort of consensus. This course involves succumbing to the forces
that guide most market participants, emotional responses dictated by greed and fear and a short term
orientation emanating from the relative-performance derby. Investors following this road
increasingly think of stocks like sowbellies, as commodities to be bought and sold. This ultimately
requires investors to spend their time guessing what other market participants may do and then
trying to do it first. The problem is that the exciting possibility of high near-term returns from
playing the stocks-as-pieces-of-paper-that-you-trade game blinds investors to its foolishness.
-your boy Klarman
With the United States leading the way, the western economies have crapped out. So far, none of the captive media have made any comments on how the USA has aggressively enforced the Foreign Corrupt Practices Act of 1977 aagainst everyone but itself. Those multi-million dollar monthly bribes to Afghan President Karzai by CIA henchmen represent the most egregious violation of the FCPA on record. The Constitution does not give those CIA proxies blanket immunity to violate U.S. laws. Under Obama, America has become a total Racketeering Influenced Corrupt Organization where anything goes. I wonder how much of those bribes to Karzai stuck to the hands of the CIA's guys. Probably 10% of the bribe, the going rate for middlemen.
Aliens are coming.....believe me...they already landed on the Moon...Earth is next.....
http://2.bp.blogspot.com/-MmRN4or26HQ/T6tdDDJQdhI/AAAAAAAAAJw/m1xnuUhBfR...
The only thing the Fed can do is print money and hand it over to the too big to fail banks in the form of QE. The money which TBTF banks get in the form of QE is used to speculate in currency, stock, commodities and bond exchanges. None of this reaches the main street and hence recovery in the actual economy is not possible through QE. Moreover speculation in commodities like Oil and agriculture products lead to higher prices thus making the lives of the very middle class paying taxes and the poor more miserable.
http://www.marketoracle.co.uk/Article40231.html
whatever happened to chuck "STILL DANCIN'" prince anyway?
He shot 96 today...but yesterday he had an 89...
Yeah too bad he wasn't shot 96 times on the golf course.
We have 'progressed' as follows:
Phase I---Stocks as an asset class
Phase II---Stocks as an asshat class
Phase III---Stocks as an areshort class (You Are Here!!!)
Phase IV---Stocks as an aweshit class
The Tytler Cycle Revisited:
http://www.commonsensegovernment.com/article-03-14-09.html
Sell everything and put it in the S&P 500. Step right up. Don't miss out on the chance of a lifetime.
Housing bubble was created before by easing credit standards by lenders,...no money down, liar loans etc...brought in more buyers and bid up prices.
Now Bernanke's super low interest rates attempt to do similar thing, even though banks have tougher qualifying standards.
So any normalization of interest rates on QE exit will push housing prices down. I think Bob Shiller of Yale/Case/Shiller noted this in his last Bloomberg interview.
Banks can still get hurt as even a 5% to 20% down payments don't give much cushion...especially with foreclosures delayed in court and no mortgage payments being made for 2 years.
Maybe banks hope to sell loans to Saudi Arabia this time? Or just dump them in some FNMA like toilets and pretend it is a normal capital game?
The clear message from the doctors this week is that they plan to keep administering the pills, in larger quantities if necessary, until the donkey turns into a butterfly.
Brilliant opener...lmao