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Is The Fed Trying To Create A "Bond Run" Panic? Yes... In Its Own Words
One of the most significant, if underrpeported stories of the week, was the announcement from Monday that in order to "prevent" bank runs, the Fed is preparing to impose "exit fee" gates on bond funds, in what, the official narrative goes, is an attempt to prevent a panicked rush for the exits. Of course, this is diametrically opposite of what the truth is.
This is what we said: "it goes without saying that "discouraging investors" from withdrawing funds is the last thing on the Fed's mind, which knows very well that when it comes to investor behavior all that matters is how the Fed's future intentions are discounted. And with this unprecedented step, the Fed is sending a very clear message: it may be next year, or next month, or next week, but quite soon you, dear retail bond-fund investor, will be gated and will be unable to pull your money.... what is the obvious desired outcome, at least by the Fed? Why a wholesale panic withdrawal from bond funds now, while the gates are still open, and since those trillions in bond funds have to be allocated somewhere, where will they go but... stock funds."
But wait, this would mean that instead of attempting to prevent a rush for the exits, the Fed is in fact doing the opposite, and is seeking to force investors to sell those sticky bonds they are holding on to and destroying the propaganda of a recovery (remember: you can't pitch a stable inflation-driven recovery fable when the 10Y is trading at 2.50% in the process launching the very run for the exits it is supposedly trying to avoid.
Pure conspiracy theory right?
Well, maybe. But that doesn't explain why someone else who agrees with our assessment is none other than... the Fed?
That's right: here is what a recently released research paper by Cipriani et al of the New York Fed titled, "Gates, Fees, and Preemptive Run" found:
Our paper is the first to show that the possibility of suspending convertibility, including the imposition of gates or fees for redemptions, can create runs that would not otherwise occur. This contrasts with the existing literature, which focuses on whether suspension of convertibility can prevent runs. In other words, we show that rather than being part of the solution, redemption fees and gates can be part of the problem.
more:
... we show that there can be preemptive runs that occur only because an intermediary has the ability to impose "standby" (liquidity-contingent) gates or fees. Second, we show that for an intermediary that maximizes the expected utility of its own investors, imposing a gate or fee can be ex-post optimal. Hence, for an intermediary that can restrict redemptions in a crisis, a policy of not imposing such restrictions may be time-inconsistent. The financial intermediary might like to commit not to restrict redemptions, so that preemptive runs would not occur. Absent a means of ensuring commitment, however, the intermediary will find it optimal to suspend, con firming the beliefs of informed investors who withdrew preemptively.
Stated far more simply: the mere prospect of gating creates a self-fulfilling prophecy that results in the very bank run the gate was designed to prevent.
One can be sure that the same Fed, which is proposing "exit fee" gates is quite aware of this paper's conclusions. In fact, one can be certain that the Fed is imposing said gates precisely due to the findings of this paper.
In other words, the Federal Reserve, tasked with preserving financial stability, because not even the Fed pretends to be in the inflation and unemployment dual-mandate business any more - it is all about the "not a bubble" valuation of the S&P 500 - is actively seeking to create a bond run panic!
We wonder just which part of the Fed's "financial stability mandate" covers the Fed's attempts to spark a bond sell off.
Ironically, subversive intentions aside, as usually happens with the Fed when the intended theoretical outcome comes crashing down in the real world, an attempt to created a "controlled" panic, limited solely to bonds may very well backfire and result in a paniced withdrawal of other asset classes, including the most precious one of all to the Fed - equities.
Our results have broader policy signi cance. Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs. Much of the wider policy signi cance of that risk is beyond the scope of this paper, since our model does not incorporate the large negative externalities associated with runs on financial institutions, including MMFs. But one notable concern, given the similarity of MMF portfolios, is that a preemptive run on one fund might cause investors in other funds to reassess whether risks in their funds are indeed vanishingly small.
Example of the above: the S&P downgrade of the US which was supposed to drive investors out of bonds (and into stocks), had precisely the opposite effect.
But more importantly, now that the Fed has explicitly said in no uncertain terms that gating bonds funds will likely result in a loss of "financial stability", the next time there is a mandated market crash originating from either a bond run, or wholesale liquidity extraction panic, the world will know just who the guilty party is: the Fed.
Full paper below (link)
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Bullish.
Who will buy those bonds? The FED, and then they can write off debt without triggering a derivative collapse.
Would the tribe be so evil as to enage in mass economic warfare and looting, crushing the bond market to chase the herd out of bonds on the cheap at a discount only to buy on the cheap for later engineering a total economic collapse crushing all equity holders leaving only secured bond holders intact?
Would they be that evil?
Would they so evil as to protect loan fraud to promote criminal invasion, then make the crime victims eat the perps loan fraud losses?
Would they be so evil to start a war just to sell bullets?
It's exactly as I said 2 days ago. Their remediation actions will insure the risk they're attempting to mitigate, actually occurs.
I see men's souls in pigs in giant pens in a magenda and fire hell being prodded with pitchforks by demons, "get down that chute!" he screams while stabbing the bleeding pig!
Looks like the bidding war for "swap rights" is getting heated between the Germans and the U.K.
If China is smart they will dump the U.K. altogether for the logistics and economy that Germany will provide them long term versus the U.K. ... In the immortal words of the Sex Pistol's "God Save the Queen" There is no future and England's dreaming...
Got to hand it to Mr. Willie and the Hat Trick for broadcasting this one first!
http://sherriequestioningall.blogspot.com/2014/06/imf-states-headquarter...
I was trying to think through different scenarios like this yesterday. What I ended up with was an EU/Russia/China block, and a US/UK block.....with Aus/NZ fielding both sides.
Didn't consider MENA or South America. India will trade with anybody, but China and Russia are obvious partners.
The more I think about it the more it makes sense.
The Fed will need to trigger some sort of black swan event so that they can change the rules of the game drastically.
When I became a bank officer (that is a manager in the IT department) at a medium sized bank in the Midwest I had to take classes on standard bank practices. Also part of my IT responsibilities was to manager disaster recovery for all the banks data. In the last of the four classes the topic of what bank managers are responsible to do it in crisis, meshed with my responsibilities for disaster recovery.
At lunch that day with the instructor and some of my other class mates I asked “…is there any variation for the banks disaster plan if xyz (something not in the plan) happens…” The instructor looked at me, smiled and said “…you don’t understand banking do you….We always do what the plan says to the ‘T’…” to which I relied “…even it leaves the systems screwed up and this could be avoided…” The instructor chuckled and said “ …The only variation we allow in this Banks disaster play book are those policies approved by the bank management, the banks auditors and what fits within government polices…those silient policies can be implemented within minutes…”
So that is how it is done. Pre-approve it and implement it with minutes…
I don't understand this. What are the consequences and what are they trying to achieve?
Doomsday Entertainment:
Please post estimates of CDS effects on financial institutions in the event of the above "Bond Run".
This is the kill switch for the Global Banking System, Central Banks and all.
no worries, it all nets out.
/s
(is more like detonation cord).
Crap, any parent with teenagers can predict this response. You tell them you absolutely, positively can't do something and the amount of time before they try is so short it can't be measured by modern technology.
The Fed is trying to create a stampede before its insolvency catches up with it. Right now the Fed is buying back https://s3.amazonaws.com/khudes/Fed+insolvency.pdf outstanding bonds https://s3.amazonaws.com/khudes/R-01-119-P-001%3DDESCRIPTION.pdf This power transition model predicted with 90-95% likelihood that the US and the rest of the world would would wake up to form a coalition that realized the world would be a far, far better place without the Fed and the rest of the banking cartel: http://philosophyofmetrics.com/2014/02/18/sdrs-and-the-new-bretton-woods...
The chance we win and the Fed loses became 90-95% after I published my statement in the UK Parliament House of Commons Public Administration Select Committee Report on page 186 Complaints: Do They Make a Difference? "Today's dire circumstances call for immediate and forceful intervention in the hope that time still remains." and Elaine Colville published her complaint on page 178 "It devolves on Parliament to sort out this egregious state of affairs."
http://www.parliament.uk/documents/commons-committees/public-administration/Complaints%20Consolidated%2024%20July.pdf
Did Simon Heffer's call for Tony Blair to be put on trial before the House of Lords for alleged crimes, or for criminally damaging the public interest, http://www.dailymail.co.uk/columnists/columnist-1069309/Simon-Heffer.html have anything to do with a UK citizen's criticism of Parliament? https://s3.amazonaws.com/khudes/em+UKParliament.pdf
Progress on the takedown of the banking cartel: https://s3.amazonaws.com/khudes/Twitter6.18.14.pdf
The link to this document https://s3.amazonaws.com/khudes/Twitter6.18.14.pdf was broken in my previous comment http://www.zerohedge.com/news/2014-06-19/fed-trying-create-bond-run-pani...
https://s3.amazonaws.com/khudes/Twitter6.18.14.pdf
I'm not very savy in these things. We are savers who are now retired and living in Mexico mostly on our savings, which are not making any interest in the US but 3% in Mexico.
My Question for all you wise people - what do you thiink happens to the peso if/when things go south in the US ?
If the Mexican peso is just another fiat currency then it will go down the tubes like all the other, depending upon how badly the central bank has been treating their economy (among other things). If you want to protect your wealth buy gold and silver bullion, non-numismatic coins, gold to preserve wealth ans silver to use as money for local transactions. Mexico produces such coins although in non-standard weights in think.