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JPM Previews Rising Rates: "In The Short Term, Investors Sell What They Can"
Over the weekend, JPM addressed the question of whether "asset price inflation, produced by 7 years of zero interest rates, has to morph into asset price deflation when the Fed starts hiking rates." It further adds: "We have for years argued that the driving force pushing up all asset prices has been falling uncertainty in the presence of no return on cash. Does this logic then not imply that the coming end of easy money must turn asset price inflation into price deflation, or a generalized bear market?" Unlike Goldman, which is so terrified of the rate hike it takes every opportunity to assure its few remaining flow clients that the only thing more bullish of ZIRP are rising rates, JPM covers every base: "the answer is Yes, No, and Depends."
Here is the breakdown:
On the No side, we see improved US growth (a 3% pace instead of the 2% of the first five years of the recovery), no real pick up in inflation and only a relatively slow pace of tightening by historic standards -- 250bp over the first 18 months. This is not 1994 when the Fed did 300bp in less than one year. In addition, the Fed will likely only be joined by the BoE in hiking while the ECB and BoJ look set to remain in easing mode. This means that global liquidity will likely remain plenty and that the resulting dollar appreciation can substitute for higher rates in tightening monetary policy.
All of this, of course, assumes it doesn't snow in 2015, or 2016, or 2017, etc. It also assumes that the "improved growth", which right now is tracking at the lowest annualized GDP for 2014 since Lehman, doesn't flip on the back of Europe's triple-dip, or China's suddenly crashing economy, which over the weekend posted the weakest metrics since Lehman. So yeah, two of the three biggest economies in the world grinding to a halt, while Japan just posted an nightmarish -7.1% GDP print. What can possibly go wrong for the US "improved growth" thesis?
Which brings us to...
On the Yes side, raising the return on cash creates an alternative to other assets. In addition, raising rates after seven years of zero-return-on-cash increases uncertainty, as we all assume that some asset classes and investors could have become overly dependent on easy money. The evidence we have on past tightening cycles, reviewed last week, cannot be directly extrapolated to this one as the Fed has never held rates at zero or for such a long time. On average, there were only 15 months between the last cut and the first hike since the 1960s, with the longest lasting 37 months (early 1960s). This week shows that investors intuitively pull back from all assets into cash when pricing in earlier rate hikes.
Or, to summarize, since the Fed's central planning has never lasted longer, JPM has no clue what will happen. Moving on...
On the Depends side, we mentioned last week that higher growth as a reason for higher rates is much less disturbing to markets than higher inflation. In addition, there remains the open question of whether the market can organize an orderly transfer of OTC risk assets, primarily credit, in the absence of easy-to-expand bank balance sheets, when shorter-term oriented investors try to exit. The hope of many is that yield-oriented insurers and pension funds will effortlessly scoop up any better-yielding bonds discarded by retail and hedge funds. The risk is, though, that the former will take their time when they see the falling knife of falling bond prices and will only enter at rock-bottom prices.
Which brings us to JPM's conclusion: "we anticipate that the start of US rate hikes will do damage to markets in the short term" although only early on, because obviously that's when the PPT will kick in, or as JPM puts it "there will be greater differentiation over a more medium term between liquid and less liquid assets."
That's the good cop.
Here is bad cop again: "In the short term, investors sell what they can, making liquid assets more vulnerable."
And since no bank can end on a dour tone, here, to conclude, is good cop: "But over a matter of months, we think liquid risk assets, such as equities, will fare better than less liquid credit, adjusted for their normal volatility."
Translated: JPM will be selling "more liquid" stocks to "investors", while buying less liquidity debt. After all, remember: the Fed's definition of "high quality collateral" is, debt. Not equity.
And it is precisely debt that all the banks are desperately trying to load up on as they sell every last stock in their possession to what little is left of the retail investor as possible.
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They have shut down all selling at the exchange level now they are rocketing straight up. Selling is a thing of the past, only buying now.
This tightening cycle has more to do with Yuan ascendency vs. wise Janet or impending recovery.
Watch the FTZ.
Buyers allowed anytiime. All selling applications must be submitted in triplicate to TPTB. If approved, a notice will be sent via us mail.
There will NOT be a USD as world currency if USA does not allow S&P to go to 400, oil at $20 and insolvent bank lobby decimated
Death of USD = death of Western world
Not without dead bodies lying on wall street and city of london, inundated in blood and 50 bullets on each body
Wow ekm1, quite an apocolyptic view.
I just finished listening to a Martin Armstrong audio that is a direct 180 of your view. Waste of time IMO. He says there is no choice and won't be of anything but the USD, gold will fall as govts want strictly digital currency & most laughable of all "diamonds" as you can get thru the scanners at the airport with them.
LOL
I have been following Armstrong for 5 years almost daily
He changed the tune after he got out of jail when government refused to give him a passport.
He is saying the opposite of what he used to say, after they allowed him a passport
Don't ask! Don't tell!
Throw Jamie Dimon down the well!
chunga,
Is Mr. Dimon done with chemo? Is he going to be okay?
He's resting comfortably in the Lake of Fire.
(only kidding I don't know lol)
Douse him with ether. Let him get good and comfortable (don't let it be said that I am a cruel man) then set him on fire.
Raise rates...... lol... Is it Sunday? Because I swear I'm reading something from the funny papaers.
Saying they're going to raise rates is basically the same as saying they are going to default on the debt, ain't going to happen.
So, you want in on some of this sandwich bet action, too?
I wouldn't bet any of the old pros on here anything, but If you wanna explain how you think they can pull it off / what you think their game plan is I am all ears.
Fonz said something about how they were going to raise rates too in one of the debates down here, but he never did say how he thought they would do it as far as I know.
I just can't see it, with both major corps and the gov addicted to cheap debt and levered up to their eyeballs, it would seem that any rate increase would blow the whole thing up.
I think they are desperate, and the rate raise thing is just talk in order to keep up the perception that they actually have an exit strategy for an impossible situation.
"a relatively slow pace of tightening by historic standards -- 250bp over the first 18 months"
Somebody get the smelling salts. NoDebt just fainted. Holy shit, 250 bps? Doc is gonna owe me TWO sandwiches if that happens!
Yeah, I thought the same. Zirp for six years, and then 250bp over eighteen months? Why would the Fed do that?
look at these fraudulent manipulated Fraud Markets rally in the last hour on NOTHING............
I thought they were including Russel 1000 equity now in their High Quality collateral.
Thanks for making it impossible for me to take any article seriously when the word "Depends" appears.
How much did they get paid to write such obvious dribble?
Rates are going nowhere.
JPM Dickheads should stick to what they know: hookers, blow, tequila and cabana boys. Especially on weekends
Burn the Morgue to the ground. Jail Dimon and all his flunkies and their fraud ridden criminal syndicate.
Why does any investor need "liquidity?" Didn't CNBC say,"there Billions sitting on the sidelines just waiting....."
Interesting times
In the 1800s Great Britain was the colonial power using and abusing nations - backed by the Rothschild family
In the 1900s it was the US backed by Wall Street's big banks
In the century it will be China
What will change on the banking side?
LOL
That never gets old - referring to stocks as "equities". How does Tyler keep that straight face?
And when stock holders are referred to as "owners"...Ha!
OK lets go back to pretending this is not a sham and is rational even intellectual.
Lord, deliver us from accountants.
I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large percentage of wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.
It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years. More in the article below.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....
Many years ago, we used to cruise the highways in our area, and take turns doing a drive-by shotgun blast at those ugly-assed corporate billboards along our roads. I don't know that it changed much, but it felt pretty good, and the owners got the message that we didn't much appreciate their medium. Get it?