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Investors Are Too Comfortable In The Fed's Win-Win Conditions For Taking Risk
Via Scotiabank's Guy Haselmann,
For a long time, Fed printing via balance sheet expansion has been the key to understanding markets and the predominant driver that has trumped all other matters. Investors have been able to ignore significant global events, tensions, and economic conditions in faraway places, because a lower real and perceived risk premium from implicit Fed promises was the single most important aspect driving asset prices higher. This game is quickly coming to an end.
As the Fed’s asset purchase program ends next month, global events and global economic fundamentals will have to be taken into account and priced accordingly. Investors have become too comfortable and entrenched with the idea that Fed policy provided a win-win condition for taking risk; whereby, weak economic data meant more Fed printing, while strong data meant better fundamentals coupled with a Fed that would (still) only respond slowly and gradually. This cozy arrangement is ending and investors have not yet adequately recalibrated.
Furthermore, at 80:1 leverage, the Fed’s balance sheet is probably close to its practical limit. It stood around 20:1 pre-2008. As it currently stands, should the Republicans take the Senate during the mid-term election in November, criticisms will mount, potentially leading to a major restructuring of the institution.
The Fed has always been over-promising on what it can actually deliver. Yet, it has been wildly successful at altering investor behavior. Over the past several years, Fed ‘promises’ spawned investor fears of underperforming peers and benchmarks, and steered investors away from risk management and fiduciary prudence and concerns about receiving adequate compensation for the risk. This needs to change. The rise in asset prices in recent years means that assets today offer lower yield with higher risk.
The Fed zero interest rate policy has also fueled debt-financed share buyback activity by firms, amounting to over 7% of the total amount of the market capitalization of the S&P 500 over the last 18 months. This indiscriminate buying has masked true fundamental conditions, thus aiding complacency and distorting accurate valuations.
Despite improved US economic progress, economic improvements were unlikely to ever get sustainably strong enough to justify valuations, so an adjustment down to appropriate valuations was inevitable and only a matter of time. A move into the ‘right-tail’ of the asset price distribution typically precedes ‘busts’ into the ‘left-tail’. The longer and deeper the current phase lasts, the worse will be the ultimate fallout.
Fed money printing should have stopped when money velocity continued to fall. Money, similar to US Treasury securities, is debt tied to the future taxing capacity of the US government, except it’s a liability that just circulates around. Debt borrows from future output. Therefore, Fed and governmental actions that are taken today to prevent a depression could be sowing the seeds for causing a future one.
The Fed seems to be doing all that it can, but it is not a stretch to argue that maybe the Fed simply does not possess the proper tools in which to influence, let alone achieve, its mandates. Unfortunately, ‘doing all it can’ while underestimating the unintended consequences may have calamitous implications for financial markets and the economy in the long run.
The Fed can print, but it cannot increase demand, or determine where the dollars go. Fed tools cannot deal with soaring social welfare costs, an aging population, and skill mismatches. There has been a diminishing return of each dollar of newly printed debt, i.e., spending today barely buys any additional GDP. Keynesian spending measures may (similarly) be counter-productive in the long-run. Increasing debt levels depresses the money multiplier effects due to higher debt servicing levels (i.e., borrowing from future consumption).
Fed policy is shifting and no longer overwhelms all other factors. Markets are no longer receiving quasi-coordinated one-way stimulus from central banks and governments. Over-indebtedness has become a focus. Some central banks are hiking rates to prevent capital outflows. Japan and the EU are (arguably) in recession. China is slowing and has credit and property bubbles to contend with. Protectionist actions and counter-measures are beginning to have far-reaching economic effects. Unrelenting violence between Shia and Sunnis rages. Hong Kong has spilled into mass civil disobedience. The list goes on.
The risk / reward skew has dramatically shifted in recent months. Improving US fundamentals will not power (risk) asset prices higher, because prices have not been about valuation but rather only about Fed policy and investor behavior. Investors should move toward capital preservation strategies. In the meantime, long-dated Treasuries remain an excellent place to hide. I remain a bond bull and still expect a move under 3% for the long bond.
“She was practiced at the art of deception / Well I could tell by her blood-stained hands / you can’t always get what you want, but if you try sometime you just might find you get what you need.” – The Rolling Stones
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"Keep firing, assholes!"
http://www.youtube.com/watch?v=PNcDI_uBGUo
If you're talking employees then I would say you have it about right.
"Except for the assholes in charge" of course.
My understanding of chattel slavery was that it was too costly to sustain.
I may yet be proven wrong by the zero coupon posse however.
I love to explain to people that Eli Whitney was responsible for ending slavery in the US, not King Lincoln.
My 2005 car is clunking out. Can we get a cash for clunkers II?
No. But the Fed might buy it from you with a repurchase agreement.
Blah, blah, blah---the markets will do whatever the crime syndicate wants them to----in FIAT. The only "analysis" worth doing is when (or if) the crime syndicate will ever lose its ability to commit the force of murder against the population to force them to accept their rule by "fiat". They can make the value of the dollar, the price of money, the value of stocks, the cost of commodities---ALL OF IT---WHATEVER THEY WANT WHENEVER THEY WANT as long as they maintain the military and their ability to kill whoever questions their crimes.
Look around----Sadam questioned fiat dollars---he was killed; Quadafi questions fiat and wanted a gold backe dinar----he was killed---on and on and if you don't go along with the crime syndicates pillaging, enslavement, and feudalistic totalitarianism you will be shut down and as long as we have a corrupt military industrial complex (at the top---not the troops) that is willing to protect the criminals we are all slaves, PERIOD!
Why bother analyzing anything other than whether the totalitarian system we live under will ever be overthrown? My feeling, despite so many peoples optimism, is that it will not because it seems the proletariat will continue to enjoy bread and circuses and the technology the crime syndicate has to control is far more global and sophisticated than previous civilizations. The only risk the crime syndicate really has is if there is life on another planet --- by destroying the proletariat's will to innovate and live, they are destroying our ability to reach for the stars (And defend ourselves against whatever might be out there). IOW, short of an attack from outerspace by another civililzation, the crime syndicate on this earth will just continue to destroy and denigrate us into the ground!
There you go---simple as that---no need to prep, no need to save, no need to do shit because in the end we are all fuck by these criminals unless people wake up---and that term is old and tired!
Having reached all of these same conclusions, I can only revert back to the wisdom I obtained in bootcamp; "Yours is not to wonder why, yours is but to do or die."
Something else I've learned? Love is infinite. While we can't win, neither can they.
We have been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years. Have these actions really worked or merely masked over major flaws and problems? I contend that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future.
Modern Monetary Theory often referred to as MMT by its many believers is to remove much of the risk ahead and guarantee that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money. Newly acquired tools like derivatives and currency swaps are suppose to allow us to print and manipulate away problems. This has created an "almost surreal" feeling of indifference towards reality. More on why debt does matter and the system is about to fail in the article below.
http://brucewilds.blogspot.com/2014/01/have-we-been-lulled-into-complace...
Make no mistake---what has been done by the crime syndicate was not incompetence---they know exactly what they are doing. The financial repression, the geoengineering, the taking away of our rights---it is all part of a program by these criminals to destroy freedom and centralize power.
The reason the crime syndicate has had power of the proletariat is because of bread and circuses---even smart people who understand finance try to explain all of the criminal activities away as incompetence or whatever, BUT MAKE NO MISTAKE---IT IS THIER ENDGAME FOR GLOBAL DOMINATION AND IT IS WORKING quite well, as evidenced by people trying to explain things with one theory or another----the only "theory" you need to know is that they will price things wherever they need to rob the masses---PERIOD!
"Furthermore, at 80:1 leverage, the Fed’s balance sheet is probably close to its practical limit. "
Just wait till they start selling assets like Yellowstone National Park....
Yeah!
And the banks start repurchasing their toxic assets from the Fed.
Oh stop with the "skill mismatches" already, the "mismatch" is that we "need" someone eight feet tall who will work for three cents an hour, in order to bring back economic activity from China. But I agree, the Fed is not about to produce a lot of eight foot tall workers.
Say What? This closing statement contradicts the entire content of the article, is it an editing error?
Nope, it's just you in trouble, me thinks.
What planet did you say you lived on?
See it here.
http://www.showrealhist.com/RealDow.gif
http://www.showrealhist.com
Uh-huh, this town's full of money grabbers
Go ahead, bite the Big Apple, don't mind the maggots...
[/Shattered]
Kool-Aid Commercials 1950s-1990s
http://www.youtube.com/watch?v=PH1ZcKc4Pc8 (4:06)
Kool-Aid commercial
http://www.youtube.com/watch?v=nBeUGqeYsQg (0:27)
The bond market should scare the shit out of you. Who the hell is going to buy all that paper when not if interest rates rise eh?
Or how about this?
I'll tell you one more time. This nightmare either ends in a Nuclear War or with the three gorgon sisters, Oceania, Eastasia, and Eurasia.
Nobody wants a nuclear war so I guess it's 1984.
(btw the dollar is as good as dead even if it's still running around like a chicken with its head cut off)
totally agree with this analysis.....the FED is now acutely aware of the negative marginal returns that come with further balance sheet expansion. We are going to see a risk-off move very soon and bond yields will prob sink to fresh lows for the year. Secretly, such a move will probably be welcomed by many in the FED..as it will support their own leveraged balance sheet, and underpin the pricing of global collateral. The bond market is, and always has been, far more important than equity markets. The global system can withstand a repricing of equities....a repricing of sovereign bonds would be catastrophic. Of course we will see that in time, but as some have said during this 6 year period, there are only bad choices left on the table now and the FED will take the lesser of two evils in the short term.
..."The bond market is, and always has been, far more important than equity markets. The global system can withstand a repricing of equities....a repricing of sovereign bonds would be catastrophic...."
Excellent Post..