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Because Of The Fed "Mortgage Market Liquidity Is As Bad As When Bear Stearns Failed"

Tyler Durden's picture





 

Remember the main reason why the Fed should have tapered, namely the illiquidity in the bond market it is creating with its feverish pace of collateral extraction, and conversion of quality collateral into 500x fwd P/E dot com dot two stocks? Here to put it all in context is Scotiabank's Guy Haselmann: "Through its QE policy, the Fed buys $3 of mortgages for every $1 of origination.  The consequence is that secondary mortgage market liquidity has been decimated: it is as bad as when Bear Stearns failed." That's just MBS for now. However, since the Fed has refused and refuses to taper, the same liquidity collapse is coming to Treasury's first, then corporates, then ETFs, then REITs and everything else that the Fed will eventually monetize. Just like the BOJ.

As a post script, here are some other observations from Haselmann:

  • Moral Hazard has run wild due to Fed policies. Risk appetite, complacency, and market speculation are at elevated levels.  Buyers are scrambling to find assets to buy. As a result, there has been a surge in debt issuance, especially of riskier securities like covenant-lite loans, leveraged loans, and payment-in-kind bonds. 
  • The Fed does not have an inflation problem, simply because the $3 trillion+ it has created out of thin air has not been lent into the fractional reserve system.  In other words, the velocity of money has been falling.  The lack of visibility health care costs, the national fiscal budget, the tax code, regulatory rules and economic growth generally (to name a few), is so widespread that it is impossible to assess the financial logic behind potential capital investment projects. When this uncertainty fades, the velocity of money will rise and the Fed’s ability to control inflation with be challenged accordingly.
  • IPO’s have also come at a fierce pace, taking advantage of investors scrambling to put easy money to work; and who may not be giving enough attention to valuations and the risks involved.  Market pundits seem to fuel investor complacency with daily statements that equity P/E’s are historically cheap. However, comparing today’s “new normal” growth trajectory to the high growth period of the 1990’s seems misguided.  Furthermore, the current environment is unprecedented and the “E” is a rapidly moving target.
  • The P/E’s of the top 50 Russell 2000 stocks is over 45.  The P/E of Linkedin is 755, AOL’s is1278, Chipotle’s is 54.  After Twitter’s IPO tomorrow, the stock will trade near 42X revenues (because it has no “E”).  Now that is “cheap”- at least relative to where some stocks traded during the dot.com bubble.
 


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Tue, 11/05/2013 - 19:28 | Link to Comment Al Huxley
Al Huxley's picture

the Fed buys $3 of mortgages for every $1 of origination - Isn't that the point - ie the other objective of QE (other than monetizing the deficit) - get questionable quality mortage debt off the banks books?  Nice to see somebody else shares my opinion on where this is going to go, though (eg idiotic multiples funded by a FED put waay more reliable than anything Greenspan ever put out there).

Tue, 11/05/2013 - 19:50 | Link to Comment TideFighter
TideFighter's picture

Yellen's Doctrine will reign over the next three years. I expect to log into ZH and see the same responses then, as I do now. Doubtful is the often touted safety and security of stores of value; which will only increase when accumulated in places accessed by our government or made illegal. I'm a converted silverbug, and that means from, not to. 

Tue, 11/05/2013 - 20:17 | Link to Comment AllWorkedUp
AllWorkedUp's picture

Can't say I blame you or disagree with you. The last few years have been a nightmare and the opportunity cost of holding gold and silver have been devastating.

 Yo're probably right, Yellen comes in, changes nothing, and the media keeps G & S at bay with the constant threat of taper. The Wall Street criminals and their HFT's continue the game.

 Nascrack back to 5K is all that matters.

 GL to you.

Tue, 11/05/2013 - 19:33 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

"Help! I've fallen (into QE) and I can't get up (out)." - BernankeYellen

Tue, 11/05/2013 - 19:57 | Link to Comment kaiserhoff
kaiserhoff's picture

Liquidity is an issue for the professional bond traders, but for the rest of us, the real issue is who gets stuck with this toxic waste when the music stops.  At anything like normal interest rates MBS will lose between half and all of their value.   Coming soon to a country near you.

Tue, 11/05/2013 - 19:37 | Link to Comment uncle.bigs
uncle.bigs's picture

Price fixes any liquidity problem.  If there is a shortage of mbs, price should increase.  Problem solved.

Tue, 11/05/2013 - 19:36 | Link to Comment max2205
max2205's picture

Bill gross says it'll be like this till 2016...what a douchebag

Tue, 11/05/2013 - 19:37 | Link to Comment asteroids
asteroids's picture

The FED fucked up the equity markets and then had a crash in 2008. The FED is now fucking up the bond markets. There will probably be a crash there as well.

Tue, 11/05/2013 - 19:39 | Link to Comment yogibear
yogibear's picture

The Fed seems determined to make this bubble at least as large as the DOT COM bubble or larger.

Once this blows it's it for the Fed. Their done. They have nothing else. All their tools won't work once there is a currency crisis. Their hoping they can get some growth on ever-increasing QE.

 

Tue, 11/05/2013 - 19:48 | Link to Comment ChaosEquilibrium
ChaosEquilibrium's picture

The FED can increase the velocity 'overnight' by lowering the excess reserve rate above the funds rate.......HOW THEY CONTROL that MONSTER?......We will be lucky if half survive:):)

 

The FED MUST go down the road of QE....to stop or withdraw indicates their LAST bullet has FAILED!!

It is time for the FED to load up Dollars on B-52's and begin the bombing.....preferably in the Midwest....so I CAN SPEND THOSE DOLLARS BEFORE EVERYONE ELSE REALIZES THE ILLUSION!!:)

Tue, 11/05/2013 - 21:36 | Link to Comment moneybots
moneybots's picture

"The FED MUST go down the road of QE....to stop or withdraw indicates their LAST bullet has FAILED!!"

 

We are beyond failure then already, as QE obviously isn't working.

Tue, 11/05/2013 - 20:35 | Link to Comment lotsoffun
lotsoffun's picture

yogi - no.  i really don't think they are (hoping to get some growth).  the fed is owned by the banks.  right now the banks with the biggest swinging dicks are goldmine and jpmorgue.  jamie and lloyd both make about 35 million in bonus this year.  the year is almost over, the bonus $$$ are getting locked in.  bennie does what they tell him.  so these guys are both gunning for each other, but there is agreement this year, they will both be neutral. then they put the shorts on and nobody really knows which of them will survive.  but like junkies and drunks, dear god, just give me one more (35 million dollar bonus).  once they have the defense (shorts and cds etc. in place) they tell yellin to pull the plug, and then their true gambling  natures come out.  it's next year, now i have no doubt.  and schumer is setting up hill-bitch and that's going to cost them.  because bama was their bitch and pliant and eager.  hillary thinks she has a mind of her own.

watch and wait.  don't go short until jamie and lloyd bag their bonus.

 

Tue, 11/05/2013 - 20:55 | Link to Comment moneybots
moneybots's picture

"The Fed seems determined to make this bubble at least as large as the DOT COM bubble or larger."

 

A bubble has to be bigger than the previous bubble, to overcome the losses of the previous burst bubble.

Tue, 11/05/2013 - 19:41 | Link to Comment Zer0head
Zer0head's picture

"beer is a major driver of Canada's economy" and

"Beer makes 1 out of 100 Canadian jobs"

according to Canada's National Broadcasting Service

 

http://www.cbc.ca/news/business/beer-makes-1-out-of-100-canadian-jobs-1....

 

Tue, 11/05/2013 - 19:45 | Link to Comment Major Major Major
Major Major Major's picture

Hooray Beer!

Tue, 11/05/2013 - 21:22 | Link to Comment Zero Point
Zero Point's picture

http://www.youtube.com/watch?v=PdwYjFnFoJU

 

How beer saved the world. Pretty funny, yet thought provoking short doco.

Tue, 11/05/2013 - 19:46 | Link to Comment Dr. Engali
Dr. Engali's picture

"However, since the Fed has refused and refuses to taper, the same liquidity collapse is coming to Treasury's first, then corporates, then ETFs, then REITs and everything else that the Fed will eventually monetize."

I wonder how long it will take these "experts" to finally come to the conclusion that the fed monetizing everything was the plan all along.

Tue, 11/05/2013 - 19:54 | Link to Comment Thisson
Thisson's picture

I'm confused - how can there be no "liquidity" when anyone with an asset to sell can sell it to the Fed?

Tue, 11/05/2013 - 19:43 | Link to Comment Stoploss
Stoploss's picture

"liquidity collapse is coming to Treasury's first" Ah, yes, but will Jan see it coming??

Tue, 11/05/2013 - 19:49 | Link to Comment AllWorkedUp
AllWorkedUp's picture

Nothing to worry about as long as gold and silver are kept under control. The beat goes on.

 Will one of you fucking countries please back your currency with gold?

Tue, 11/05/2013 - 19:50 | Link to Comment Major Major Major
Major Major Major's picture

"Will one of you fucking countries please back your currency with gold?"

 

Why, so the US can have another peace keeping mission?

Tue, 11/05/2013 - 20:39 | Link to Comment AllWorkedUp
AllWorkedUp's picture

Well, I suppose you're right. Any attempt to unseat the USD as reserve currency will be met by war, and that's never a good option.

 OTOH, just how long do we expect the rest of the world to get trashed by our currency? Whatever, as long as Wall Street and the banksters make money it's all good.

May the war start here in the US first.

Tue, 11/05/2013 - 20:44 | Link to Comment NOTaREALmerican
NOTaREALmerican's picture

Re:  Whatever, as long as Wall Street and the banksters make money it's all good.

It seems the top 10% are doing really well, worldwide.   Even in Italy and Spain the top 10% hasn't suffered.

Not just the Fed trying to keep the people that matter from being wiped out.

Tue, 11/05/2013 - 22:52 | Link to Comment Nobody For President
Nobody For President's picture

Currency backed by gold = Weapon of Mass Destruction

Tue, 11/05/2013 - 19:52 | Link to Comment Bennie Noakes
Bennie Noakes's picture

I don't understand this post.

An asset is described as "liquid" when it is easy to convert into cash. So how does the Fed buying MBS make them hard to sell?

Tue, 11/05/2013 - 20:06 | Link to Comment ChaosEquilibrium
ChaosEquilibrium's picture

Reducing the stock in the secondary market!

 

I can't technically take my MBS to the local FED bank and 'cash them in'---I must go through a middle-man transmission mechanism.......as more stocks of MBS bonds are removed(permanently from flows--the most liquid and sought after(risk/yield) dry up(illiquidity).

Tue, 11/05/2013 - 20:13 | Link to Comment Dr. Engali
Dr. Engali's picture

By removing MBS from the market there are fewer buyers and sellers. If a major seller wants to offload some MBS the lack of liquidity will blow out the spreads since there are no buyers. The fed is also putting an artificial price on them forcing yields down, therefore there is no compensation for risk.

Tue, 11/05/2013 - 20:12 | Link to Comment insanelysane
insanelysane's picture

Yippy ky yay mother fuckers, there's no turning back now.

Tue, 11/05/2013 - 20:15 | Link to Comment crtune
crtune's picture

Bullet point number two is what I have been haranging about for almost five years.  If the added liquidity stays on cash sections of big bank balance sheets, of course we will not see inflation.  There is little monetary effect of money which does not move out into the wider economy, with it's "multiplier effect". 

So, this entire mechanism of control, used by the Fed, is broken, based as it is upon an inflation stat which is based upon little added lending.  This all serves the long term very poorly.  It's fine to increase the strength, and solvency of central institutions, but at some point the trade off is no longer favorable. We are not seeing a true rebound in the general economy.  It now is becoming much more apparent why that is true.  We can't have small and mid-size business growth if lending is utterly contrained. 

Tue, 11/05/2013 - 20:27 | Link to Comment ChaosEquilibrium
ChaosEquilibrium's picture

I do not view it as entirely broken...The FED can unleash those excess reserves....it is a fucking hammer and the problem will not be a nail!  Those flows will have NO controls.....for all I know....those excess reserves could ALL end up in Spanish equities and Greek Bonds TO THE MOON!!

 

But that is the 'agreement' between the FED and WS Banks.....We will bail you out....We have bailed you out...We will continue to bail you out.......IF BIG FUCKING IF....You increase domestic credit when WE TELL YOU and YOU DIRECT IT WITHOUT QUESTION to OUR CHOOSING!

Tue, 11/05/2013 - 20:16 | Link to Comment Professorlocknload
Professorlocknload's picture

  Just baby steps further into a Centrally Planned Economic System. Can't turn the burner under the pot too high too fast or the frogs will jump out.

 

 

Tue, 11/05/2013 - 20:42 | Link to Comment NOTaREALmerican
NOTaREALmerican's picture

Merle Hazard gone wild !  

Tue, 11/05/2013 - 20:46 | Link to Comment moneybots
moneybots's picture

"That's just MBS for now. However, since the Fed has refused and refuses to taper, the same liquidity collapse is coming to Treasury's first, then corporates, then ETFs, then REITs and everything else that the Fed will eventually monetize. Just like the BOJ."

 

I thought the FED was supposed to be forced to taper.  Then they didn't.  Now there is all this bloviation about next March, then bloviation the FED can't taper.  Now a bunch of warnings that the FED has to taper and that they may taper sooner than expected, in December.

So which is it?  The FED is either forced to taper or it isn't.  It either can't taper or it can.  It can't be both.

That elderly couple in Wolf Richter's story, might as well jump in the market for 25% returns, if QE is going to continue and double down under Yellen.  They have nothing to worry about if he FED can't taper, and everything to gain, by riding the market up to 16, 17, 18, 19, 20, 21, 22 thousand, etc, as the market won't be crashing.

Tue, 11/05/2013 - 20:48 | Link to Comment Hughing
Hughing's picture

Theres an AOL? What's an AOL? Can the FED buy it? Does Cramer like it? Is it bullish? Where do I buy an AOL? #AOL?

Tue, 11/05/2013 - 20:56 | Link to Comment polo007
polo007's picture

According to Macquarie Research:

https://app.box.com/s/j0desfvkuqh6bitsvhuz

Could the Fed flip flop?

“Enlargement” could become the new “tapering”

- Our view that tapering will commence in March 2014 has become the consensus and continues to be our base case (50% chance). We place a lower probability (15%) on an earlier taper (Dec/Jan) and a higher probability (25%) it occurs later (April to Sept). While incremental delays could impact near-term asset class performance these would only provide temporary respite from longer-term trends established when expectations for tapering began in early 2013.

- One outcome (to which we assign our final 10% probability) that would result in a more dramatic shift would be a 180 degree turn or flip flop in Fed communication that caused investor anticipation to move from “taper” to “enlargement”. The potential for such a shift is barely being acknowledged (no less considered!), by consensus. This is all the more reason to give it attention in our view. Such a flip flop would have important implications for asset market returns. In particular, it would likely lead to outperformance from emerging market equities and precious metals. Treasury bonds would also benefit.

The Fed would need to doubt the recovery’s sustainability

- Incoming data are an obvious catalyst for a Fed flip flop. The labour market has softened recently (Fig 8, 9), housing momentum has slowed (Fig 10, 11) and inflation is well below target (Fig 12, 13). Despite downgrades in its forecasts (Fig 14), the FOMC remains above consensus (Fig 15). While this evidence may be enough to delay tapering, modest downgrades or data misses likely won’t be enough to change the Fed’s tapering narrative.

- In our view, for such a flip flop to take place, members must become more pessimistic about the recovery’s sustainability. What might cause this? The combination of continued soft data alongside greater than expected fiscal tightening in 2014 is one possibility. It was the worry about the impact from the fiscal cliff, after all, that contributed to the QE3 launch decision in 2013.

And the Tea Party could provide the catalyst

- Consensus expects the Tea Party and other Republicans to take a less hardline approach towards negotiations in 1Q14 after they were punished in public opinion polls as a result of the shutdown. Such a near-term detente in Washington will only become likely should President Obama make concessions. Should this occur, the President may be more willing to sacrifice on near-term spending rather than changes to Obamacare (his legacy) or long-term entitlement programs (resistance from his own party) (see pgs 3 to 5).

- The magnitude required to impact the 2014 growth outlook is not high. Annual spending cuts offsetting just one-third of the long-term debt impact from Obamacare would act as an incremental ~0.4% headwind to growth in 2014 (combined with sequestration already embedded in current law, this would mean fiscal drag of ~0.5 to 1.0% for much of the year) (Fig 7).

Tue, 11/05/2013 - 21:09 | Link to Comment moneybots
moneybots's picture

"IPO’s have also come at a fierce pace, taking advantage of investors scrambling to put easy money to work; and who may not be giving enough attention to valuations and the risks involved."

 

There isn't any risk, if the market is only going to go up.  If the FED can't taper, the sky is the limit, and as anyone knows, the sky has no limit. 

Tue, 11/05/2013 - 21:25 | Link to Comment moneybots
moneybots's picture

"IPO’s have also come at a fierce pace, taking advantage of investors scrambling to put easy money to work; and who may not be giving enough attention to valuations and the risks involved. 

After Twitter’s IPO tomorrow, the stock will trade near 42X revenues (because it has no “E”).  Now that is “cheap”- at least relative to where some stocks traded during the dot.com bubble."

Who needs an E when the FED "can't taper" and has unlimited QE?  Twitter will still be "cheap" at 1,000 times revenues.

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