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"Investors Are Now Playing An Epic Game Of Chicken"

Tyler Durden's picture




 

Via Scotiabank's Guy Haselmann,

Won’t Get Fooled Again

Central bank polices have ruptured the proper functioning of capital markets. Policy over-reach with gargantuan experimentation has, and continues, to fuel extreme mispricing of risk and mis-allocation of resources. Soaring market volatilities with wild daily gyrations are a symptom.

A battle is raging between the non-believers (doubters of policy success) versus those clinging to the hope that a soft landing can someday be engineered.  Some investors have little choice but to play along.  Some investors only participate reluctantly.  Yet, other investors move to cash or cash-equivalents, while looking for better ‘places to hide’.  For the growing number of non-believers, the secret sauce today is trying to find non-correlated sources of idiosyncratic risk where adequate compensation is offered for that risk.

So what do investors do in a ZIRP/NIRP world (Zero/Negative Interest Rate Policy)?  Why would anyone pay money to lend money?  Buyers are typically those who are mandated to do so: passive indexers, some bond funds, LDI pensions or insurance companies.  Some of them, however, are locking into losses that will at some point have terrible consequences (e.g., an insurance company who sold an annuity product several years ago that guarantees, say, a 4% return). 

Investors who are not mandated, and who do not wish to lock into losses, are incentivized to take risk.  They either have to move out the curve, assuming duration risk, or they move down the capital structure, assuming credit risk.  Since investors only receive a trivial yield boost by increasing duration or credit risk, many investors have instead moved further up the risk spectrum to equities.  The justification is often, ‘equities have upside, while bonds are capped at par’: such a comment does not take risk into account.

  • QE programs turbo charge the chase for yield because central banks hoard the safest assets.  Those who sell securities to the central bank need to replace those assets, but reinvestment into an asset that yields a similar return often means moving into a riskier security.
  • There are some fixed income managers who now get their fixed income exposures through dividend paying stocks.  Speculators who buy negative yielding bonds only do so in the belief that they will be able sell them at an even more negative yield.

With negative yields on some deposit accounts and on highly-rated securities, investors have to decide if they want to pay money for safety, or pay to avoid risk. Most decide to chase positive return (risk), causing many to extend beyond their historical risk preferences and for which many are ill-suited. Aggressive central bank activity and implicit promises have led to behavioral changes where investors have become fearful of missing out on the easy returns of markets that are perceived to rise perpetually (as long as the Fed doesn’t hike).

  • Finland became the first country to issue debt as long as 5 years in the primary market at negative yields. In the secondary market, Germany, Sweden, Switzerland and The Netherlands have negative yields on debt trading out to 5 years. Nestles became the first corporation to have a negative yielding bond.

As policy rates and bond yields plummet, and as equity markets power to new highs, investors need to recognize that future expected returns decrease, because (for the most part) rising markets shrink upside potential, while enlarging downside potential.  Nonetheless, some investors myopically believe that ‘money printing needs a home’ and that it will end up in equities (the asset class with upside).  However, such a belief needs to include a deep faith in the central bank’s abilities to navigate a soft landing.  History is not on their side.  Investors pouring into equities might be playing an epic game of chicken.  

There are significant consequences of ZIRP and NIRP.  Money market funds, pensions, insurance companies, savers, or those who live on a fixed income, are punished at the expense of the debtor.   Low rates imply less household disposable income for creditors and more disposable income for debtors.  Capital accumulation and savings - that would normally reduce overall debt levels – is discouraged.

The original premise behind the QE programs and other types of extreme monetary accommodation was to lower leverage and reduce the high levels of indebtedness that caused the 2008 crisis.  In this light, measuring the success of central bank’s extraordinary policies should include the progress made in lower indebtedness to safer levels.  Since global indebtedness has risen materially, it can be argued that levels of financial instability have actually risen and central bank policies are to blame.

Consultancy firm McKinsey & Co just issued a report finding that global levels of indebtedness have increased from $142 Trillion in Q4 2007 to $199 Trillion in Q2 2014 with debt as a share of GDP rising from 270% to 286%.  Debt is being added at a faster rate than GDP.  Policy makers are borrowing from the future to solve the short term problems of today. The result is unstable future outcomes and ballooning risks to market stability; concurrent with complacent investors unwittingly scramble for paltry returns.  Holding cash has never looked so good.

“We’ll be fighting in the streets / with our children at our feet / and the moral that they worship will be gone.” – The Who

 

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Thu, 02/05/2015 - 18:51 | 5749569 nailgunnin4you
nailgunnin4you's picture

America sucks

Thu, 02/05/2015 - 18:52 | 5749579 HowdyDoody
HowdyDoody's picture

<--- America sucks

<--- America blows

Thu, 02/05/2015 - 19:03 | 5749619 kaiserhoff
kaiserhoff's picture

I wish interest rates could go negative.

    Mr. Yellen

Thu, 02/05/2015 - 19:16 | 5749662 Harbanger
Harbanger's picture

The Article ends with-

Holding cash has never looked so good.

Thu, 02/05/2015 - 20:01 | 5749812 zaphod
zaphod's picture

Transferring assets out of the system never looked so good. This includes PMs, Pb, Land, Bitcoin.

Thu, 02/05/2015 - 20:04 | 5749819 Harbanger
Harbanger's picture

What ever happened to all them bitcoin fanatics?

Thu, 02/05/2015 - 23:58 | 5750540 nailgunnin4you
nailgunnin4you's picture

Most retired to their private islands with their harems and paperwallets while the zerohedge status quo defenders are on the street corner selling blowies for their next busted short.

 

 

Fri, 02/06/2015 - 01:12 | 5750703 Harbanger
Harbanger's picture

That's good to hear.  I was afraid they may have hung themselves from a closet pole in their parents basement.

BTW-  you're probably a young Merikan, just a guess , but I hear the douchness in your writing.

Fri, 02/06/2015 - 03:09 | 5750872 commander gruze?
commander gruze?'s picture

Others just stretch comfortably in their chairs knowing no power will ever take their bitcoins away from them. (No, EMP won't do that either).

Fri, 02/06/2015 - 05:43 | 5750970 DIGrif
DIGrif's picture

Gotta love the bitcoin peeps. What is more fake than a piece of paper in your hand you call money? Why that would be a bunch of ones and zero's zipping through space backed by absolutely nothing, that you call money.

Tue, 02/10/2015 - 18:23 | 5759930 nailgunnin4you
nailgunnin4you's picture

That's good to hear.  I was afraid they may have hung themselves from a closet pole in their parents basement.

BTW-  you're probably a young Merikan, just a guess , but I hear the douchness in your writing.

 

Suicide strikes me as a rather queer response to an ROI of over 100000% (for many). I guess you missed the price rise because the zerohedge gold cheerleaders don't mention btc rising, but announce any btc drop with enough zeal to match their **GOLD SURGING (0.13% rise) INDIA WEDDING SEASON COMING LAST CHANCE TO BUY PHYZZ!!!** articles.

 

BTW, btw is text talk one should eschew whilst making facile and redundant attempts to deride someone as young, or even worse, American!!. While on the ASSuming tip, I assume that I am older than yourself seeing as I lack the schadenfreude so synonymous with immaturity. My ego is neither inflated nor deflated upon learning of the failures or successes of another individual's investment. 

 

BBTW, I am Australian, polar opposites both in geography and writing style, no cigar for you mate (that poor guess may have something to do with the voices in your head, as one can't hear writing). G'day Sir!

Fri, 02/06/2015 - 05:58 | 5750981 JustUsChickensHere
JustUsChickensHere's picture

Bitcoin itself is experiencing genuine price discovery for a forex system with global reach, and incorruptible mechanisms for money supply growth, and trade settlement.

Currently, it is recovering from a wild hype and speculation bubble, that blew it's USD exchange rate way out of kilter with it's actual usage level.

But somewhat like Linux of 20 years ago, it continues to exist and provide some functionality. Both Bitcoin itself and the surrounding infrastructure are evolving rapidly.

Keep in mind that Linux was denigrated for many years, yet now it powers most smartphones (Android) and many datacentres - including Google.

Expect Bitcoin adoption to keep growing. It solves a couple of important issues - with the first one I think of  - being very much better than Credit Cards for helping avoid identity theft.

 

Fri, 02/06/2015 - 02:44 | 5750843 readmylips
readmylips's picture

Pb?

 

- yeah, i'm clueless, apparently

Fri, 02/06/2015 - 05:40 | 5750968 DIGrif
DIGrif's picture

Pb is the periodic table of elements symbol for LEAD...I agree, I call it my 3B plan: Beans, Bullets, Bullion....

Thu, 02/05/2015 - 22:46 | 5750316 tarabel
tarabel's picture

 

 

You have to differentiate between urban America and heartland America. The place I live in is full of honest, decent people who don't have to lock their doors and will help their neighbors. It neither sucks nor blows.

Empires do not decay in a straight line. They are often renewed with an infusion of leadership from the relatively uncorrupted frontier areas and given a new lease on life. This is the process currently happening in the USA. Urban cores are being abandoned by those who find the original vision congenial to their own desires. But a new movement is coalescing far from the cameras of the urban elites.

Fri, 02/06/2015 - 02:55 | 5750854 Chad_the_short_...
Chad_the_short_seller's picture

But I bet you all of those good ol people support israel with both eyes shut and both fists clenched.

Fri, 02/06/2015 - 04:10 | 5750904 bid the soldier...
bid the soldiers shoot's picture

Empires are like snowflakes.  No two are alike.

 

I had no idea you were so deep in denial.  Get a La-Z-Boy and a lot moar microwavable pop corn.

Thu, 02/05/2015 - 18:53 | 5749581 TeamDepends
TeamDepends's picture

Not us stackers. Nosirree.

Thu, 02/05/2015 - 19:18 | 5749671 dimwitted economist
dimwitted economist's picture

i still believe in Gold. i like Real Money...

Thu, 02/05/2015 - 18:52 | 5749577 Doubleguns
Doubleguns's picture

More like russian roulette with 4 shells in the gun. 

Thu, 02/05/2015 - 20:23 | 5749877 Harbanger
Harbanger's picture

or 2 donkeys and Barry in a Mexican standoff.

Thu, 02/05/2015 - 18:54 | 5749587 A Lunatic
A Lunatic's picture

Anyone else get physically ill when they think about the future.....?

Thu, 02/05/2015 - 18:58 | 5749602 heisenberg991
heisenberg991's picture

The future is bright. Overpopulation and massive unemployment along with robots taking away more jobs. It just doesn't get any better. Yahoo!

Thu, 02/05/2015 - 19:03 | 5749617 CapnJackDaniel
CapnJackDaniel's picture

“It is pitch blackYou are likely to be eaten by a Grue.”

Thu, 02/05/2015 - 19:18 | 5749667 MrTouchdown
MrTouchdown's picture

I'm looking forward to the main event.

Thu, 02/05/2015 - 21:15 | 5750030 Ward cleaver
Ward cleaver's picture

Best investment is companies that making robots
that manage robots. Humans standing at window, hungry
and cold watching the machines do their thing.

Fri, 02/06/2015 - 00:52 | 5750671 noben
noben's picture

< The future's so bright, I gotta wear shades.

< The future's so bright, I gotta wear welder's shades.

Thu, 02/05/2015 - 19:17 | 5749665 Creepy A. Cracker
Creepy A. Cracker's picture

Learn how to farm and chill out while Dear Leader Obama's sons shoot up the hood.

Thu, 02/05/2015 - 19:23 | 5749685 LawsofPhysics
LawsofPhysics's picture

No. with great risk comes great reward.  Personally, I would not want it any other way.

Thu, 02/05/2015 - 19:54 | 5749790 Harbanger
Harbanger's picture

At the great risk of not having Gov protection for the children, lets give constitutional free market capitalism a try.

Thu, 02/05/2015 - 19:47 | 5749761 Arrowflinger
Arrowflinger's picture

Nope. I am glad that I found out about the people at all levels - from the bottom up - of this age.

There is absolutely no sense of wonder left and more amusement than fear.

Bug out? I have already.

It is worse than even ZHers know.

Thu, 02/05/2015 - 20:49 | 5749960 Chad_the_short_...
Chad_the_short_seller's picture

I refuse to bring a kid into this world because of this. I am not going to bring a kid into this world so they can suffer. Can you imagine the next 70 years for white people? The jew has been at war relentlessly with white culture and nothing suggest it'll ever end until they genocide them, or unless the people stand up... I wouldn't bet on the latter.

Fri, 02/06/2015 - 10:36 | 5751550 StandardDeviant
StandardDeviant's picture

Thank goodness that at least one of the Nazi mouth-breathers on this list isn't going to reproduce.

(Unless this 8-week-old "Chad_the_short_feller" account is just a 77th Battalion troll...?)

Thu, 02/05/2015 - 23:47 | 5750515 e_goldstein
e_goldstein's picture

There's a cure for that, it's called hash oil.

Thu, 02/05/2015 - 19:17 | 5749658 buzzsaw99
buzzsaw99's picture

you'll be saying that when the S&P is at 3000 as well. the fed and other central bankers have guaranteed that stocks always go up forever. free money, amen.

Thu, 02/05/2015 - 20:03 | 5749818 divingengineer
divingengineer's picture

Just buy the dip and you'll be fine kid.  Take a chill pill and shake off that case of nervous diarrhea.    

Thu, 02/05/2015 - 19:18 | 5749670 MATA HAIRY
MATA HAIRY's picture

We won't get fooled again!

 

...oh, wait, yes, we will...

Thu, 02/05/2015 - 19:51 | 5749780 Harbanger
Harbanger's picture

This time it's different, said the new socialist in charge.

Thu, 02/05/2015 - 20:43 | 5749942 Consuelo
Consuelo's picture

Only those 'holding cash' of the $USD variety...   The unfortunate part for them is that they're going to be a whole lot more than 'fooled'...

Thu, 02/05/2015 - 19:19 | 5749677 techstrategy
techstrategy's picture

Just liquidate consumption ponzis like AMZN and NFLX to raise cash and buy gold.  No duration risk.  Almost no counterparty risk.  Real options without expiration.

Thu, 02/05/2015 - 19:24 | 5749691 flyonmywall
flyonmywall's picture

Amazon gross margins are razor thin. Effectively, they are negative if you add inflation in.

 

Thu, 02/05/2015 - 19:32 | 5749712 Sanity Bear
Sanity Bear's picture

Looks more like Frogger to me

Thu, 02/05/2015 - 19:44 | 5749751 American Liberal
American Liberal's picture

I, for one, am glad that the PPT exists. Can you imagine the risk put on our pension funds and 401(k) plans without the backstop of the Fed?

Thu, 02/05/2015 - 20:41 | 5749936 Consuelo
Consuelo's picture

"Holding cash has never looked so good."

Followed by:

"We'll be fighting in the streets, with our children at our feet, and the moral that they worship will be gone..." - The Who

Yes indeed, holding $cash and getting 'Fooled Again'...   Perhaps the title should be altered slightly to reflect the fact that when the next Fooling comes, holding $USD cash may not look so good after all...

Thu, 02/05/2015 - 23:34 | 5750484 SubjectivObject
SubjectivObject's picture

Bankster screed.

We're 'sposed to find the disinfo content and skewer it.

So many banksters, so little time.

Fri, 02/06/2015 - 02:57 | 5750856 AbbeBrel
AbbeBrel's picture

The whole world is now a bunch of shameless Wimpy's:

I will gladly pay you Tuesday for a Hamburger today! (what a bunch of moochers). The CB's are still claiming there are pearl in every oyster they print - see the video for the moral to the story :-)

https://www.youtube.com/watch?v=Q7PFQ7SvH4o

Nothing like bringing forward 200 trillion of consumption forward and then pretending that nothing will happen... Until Tueday.

Do NOT follow this link or you will be banned from the site!