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Trickle-Down QE
Everyone’s heard of trickle down economics, but how about “trickle down QE”?
The concept is basically the same, you just have to replace the people in the equation with bonds, an abstraction which isn’t difficult for bulge bracket banks to make, as subjugating the human element to dollars and cents has been unspoken corporate policy for decades. Just as tax breaks, etc for businesses and high earners are expected to ultimately benefit middle and low income households in trickle down economics, in trickle down QE, the liquidity injected into the system via central bank purchases of sovereign and IG corporate debt is expected to ultimately benefit high yield spreads.
Of course, this is really just another way of repeating what everyone has been saying for the last half decade: central bank largesse forces investors into risk assets by driving down yields on any asset class that could be even remotely construed as “safe.” Fortunately for those of us who are bored with buying plain vanilla equities and dabbling in HY cash credit to get our yield fix, the unique character and scope of Draghi-style easing presents investors of an adventurous disposition with an opportunity to capitalize on trickle down QE via an exciting foray into synthetic credit.
Without further ado, here’s Citi to explain how a hypothetical credit strategist will visit your fictional office and use the concept of trickle down QE to convince an imaginary you to go long euro HY credit via synthetic exposure to Crossover mezz tranches (you can’t make this stuff up):
The argument which finally convinced us that high yield is an attractive long is the potential of ECB QE to “trickle down” all the way to high yield…
Imagine … some random credit strategist showed up in your office with the following pitch: “It’s not whether you like this or not, the ECB is going to force you to take more beta. High yield is a good place to do that”. First reaction? Get defensive, partly because this (well-meaning) strategist is reminding you that what you think doesn’t matter because somebody very important is going to force you to do something.
After getting through that, you probably want some more detailed advice: “How do you propose me taking that risk?” Considering the strategists’ concerns about idiosyncratic risk, the advice will go along the following lines:
You should build a diversified enough portfolio of high yield bonds because idiosyncratic risk is high and if you’re not diversified there is a chance your losses can be very big. But if you are diversified, the most likely outcome is that the idiosyncratic risk will only cause a small loss in your portfolio.
You use the complaint du-jour to placate him: “Do you realize how liquidity is like in the bond market these days? You should know better before recommending anybody to build a diversified portfolio of high yield bonds. Diversified means I need to buy many, and that’s not easy you know, especially in ‘size’.”
So traditional remedies are clearly somewhat problematic when taking high yield risk given idiosyncratic risks. What can be done to take high yield risk, minimizing exposure to idiosyncratic risks but in a way where execution is not prohibitive?
In case you’ve lost the narrative, that last passage is Citi asking itself a rhetorical question from the perspective of an imaginary client. It only gets better when our fictional protagonist reminds the make-believe credit strategist that the last time someone came around hawking an investment “opportunity” in synthetic tranches, the financial universe nearly collapsed shortly thereafter:
By now … you’re already in defensive mode again, thinking “Here these guys go again trying to solve a problem with synthetic tranches. Don’t they remember that …?” There is plenty of resistance among many investors to use synthetic tranches on the back of not very satisfactory past experiences – we know that. But it turns out that: (i) Synthetic mezzanine tranches are a very good fit for the problem we’re trying to solve here (see below), and (ii) what caused the problems in the past wasn’t the product itself but its over-use … and that’s not the case now – and it’s not only us believing that: 70% of respondents in our recent Credit Derivatives Survey aren’t concerned about investors taking leveraged risk using derivatives. With that, let us go on with our pitch.
So there you have it. Granted, some investors had a “not very satisfactory” (i.e. the entire financial system blew up on the back of pyramided counterparty risk) experience with synthetic tranches in the past, but “it turns out” that the problem wasn’t really the complexity of the instruments, but rather their “over-use” (so, too much of a good thing?). Of course, there’s no over-use problem now (which certainly has nothing to do with investors’ collective memory of what happened last time) and ultimately, you don’t have to take Citi’s word for it, you can just ask any of the banks and hedge funds they surveyed, nearly three-quarters of which definitely aren’t concerned about you taking leveraged risk with derivatives.
Getting to the specifics (and briefly stepping back from the sarcasm), it’s the Crossover S22 10-20% that you want, as it gives you enough subordination to dodge a few idiosyncratic default bullets and still pays a running spread above 550 bps. For those who buy the trickle down QE narrative and actually see an opportunity in HY heading into ECB asset purchases, here’s the default exposure on this:
* * *
Of course, these types of trades are intended for sophisticated investors and in a post-crisis world characterized by humility on Wall Street, we can be sure that these “opportunities” aren’t advertised to clients for whom they aren’t suitable.
From the introduction to the above-quoted Citi note:
Our target audience for this piece is the non-seasoned tranche investor. Don’t be afraid of reading on if you haven’t been involved in tranches before. We’ve written this piece so that you won’t get lost.
And in case you also haven't seen how all this ends, Citi previewed that as well, in "Citi Warns Of "Dancing", "Music" And "Complicated Things" For The Second Time..."
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The only thing that ever trickles down is the blood after wall st fucks you hard.
I thought it was the Blankfein Golden Showers.
Obama's trickle-up poverty will drown us all eventually.
There must be a special place in Hell...
@ Pure Evil ~ Golden Showers will 'soon' be discussed on the Greek bill artwork thread.
just sharing: New aggregator site I just found that pretty much includes all kick ass sites (like ZH) all in one as well as video blog/podcast links. Very cool...just in case any of you all hadn't found it yet. I have no affiliation or anything like that...just think it includes essential informational sites for all our interests and purposes.
http://thelibertymill.com/
My spider senses tell me that clicking the link will get me put on a list.
MEH ~ WTF? Once I had a guy pull a 9mm on me as a carjacking... I happened to have a 17" KUKRI under the seat... I reached down & pulled it out & said he'd need to pull off at least 4-5 accurate shots b4 I was dead, [during which time I could take either his head or his arm off in the process]...
Turns out he was a smart fellow & 'reasoned' himself into the correct decision...
Is this a safe investment strategy for an 83 year old retiree with mild cognitive issues and little savings?
"Evil actions are the result of ignorance." - Plato
I'm waiting on my second trickle down, I gave up on the first one.
They'll be happy to pass on the nail guns.
More like trickle down portfolio 2.0......
The uses and abuses of history
http://www.economist.com/blogs/buttonwood/2015/02/economics-and-finance?...
A second mistake, in his view, is that both governments and central banks have been too keen to return to normal policy and thus have withdrawn support too early; this explains the sluggishness of the recovery. He also argues that changes to financial regulation have been pretty "weak soup" by the standards of the 1930s which saw the creation of the SEC.
To me, the monetary policy of the last few years is simply a continuation of a theme since the 1980s. When financial markets wobble, central banks step in to cut rates for fear of 1930s-style debt deflation (this was very explicit after Black Monday in October 1987). But each intervention leads to lower rates, a bigger financial sector and higher debt levels, making central banks even more fearful, and requiring even greater intervention. So we get to today's combination of zero rates and outright asset purchases. In turn, this leads to wider inequality, as the rich benefit most from higher asset prices, and this inequality causes political unrest, adding to the potential for crisis. This interpretation draws on the work of Charles Kindelberger's history of financial crises and Hyman Minsky's thoughts on how economic stability leads to financial excess. But I fully accept that I may be suffering from "confirmation bias" forcing every event into my peculiar interpretation.
But 98% of Merican don't understand this because they are either deaf, dumb, or blind
Actually that was very good. I'm beginning to get it.
Thanks to the Cromnibus pushed by Obama and Jaime Dimon the taxpayers will be on the hook, so gamble away, the 99%ers are yet again on the hook to pay for the gambling of the 1%ers.
It's okay because the collective mindset vanishes after 6 years, so no worries, we will see an endless amount of "No one Saw this coming" soon
I can't imagine many institutional investors are truly dumb enough fooled by this. What's going on here is corruption, plain and simple. The system is rotten to the core, loaded with "Pay to Play". See Jefferson County, Alabama for an example.
Round-robin QE to transfer any wealth to the banksters.
Fed QE-> BOJ QE-> ECB QE->Fed QE->BOJ QE-> ECB QE ... continued until a currency dies.
What the fuck did I just read? Can anyone sum this up in Barney speak, I am a little slow...
we have this really cool investment, nobody can understand it but it's really cool and it will take a while to realize you made a big mistake, and we get all the profit, but your a smart cookie and you can probably unload this on somebody dumber than you. beside we both know your not playing with your own money, and hey lets go play some golf at your club, mine kicked me out.
I'm trying to get a warm feeling from this, other than the one trickling down my pant leg right now.
yea, i lost (LOST).
SO , trickle down i get
as condensation involves
a phase change including
a dramatic demonstration
observed as liquidity and
all that drips off everything
it drips off.
i know, that may be accurate
but it does not help, apologies.
Just STFU "trickle down QE" you mean please print Dollars,so the Elite can suck the AMerican public dry.
How to Pee in Public Project - Ladies Only!
http://www.youtube.com/watch?v=YzHAZmYNvKE (4:15)
For those who complain about how QE benefits the rich --- keep in mind that pension funds are heavily invested into equities --- if the Fed stopped buying/making cheap money available to corporations to buy back their punk assed shares pushing the overall market higher...
Guess what would happen to your pension funds?
So everyone is benefitting from QE --- not just the rich.
QE is delaying the massive collapse that is inevitable and imminent
Speaking of tranches... CDOs are baaack!
http://michaelekelley.com/2015/01/28/remember-cdos-theyre-baaaack/
Thanks
Quiet Flows The Trickle
Dammit... what a waste of words! Everybody knows what synthetic mezzanine tranches are so couldn't we just shorten it to SMT's??
I listened to my Dad when I was younger,.
What a fucking idiot I was. H taught me that the way to get on life was to be honest, work harder than you play and quit whining, ever, and do things with a smile, and never ever believe anyone.
Then this comes, trickle down, and all my life I believed in trickle up.
Mt Dad did too.
He believed if you worked hard to get started, built a small business, hired people as you grew, took good care of them, valued them, and they worked hard alongside you, then you start to go places.
Fuck me, does this mean I wasted my entire life when i could have been sat in front of a goggle box getting as fat as that cunt velizealous and gone for Guinness book records in drinking more Coors and eating more fucking macdo's in a year than anyone ever did before, and ALL i had to do was wait for the trickle DOWN.
Fuck it, no more fucking trickle ups from me.
Im too old to change now, so I cant fuck about waiting for trickle downs, but I can damned stop any more fucking trickle up.
Note to IRS.
Fuck Off you thieving cunts, you lied to me and now it seems I was the daft cunt sending you the cash to distribute so it could come cascading down again.
not a fucking cent more will you thieving cunts get from me. I seen all the fat fucking couch bums adding 50 lb a year and now I know how they got that way.
You cunts gave it all away to fucking retards, like GS MS JPM GE and GM and IBM and CB
Bastards, I blame my Dad for fucking lying to me
The less well publicized, but much more obvious, trickle up effect.
Those with excess Capital invest and collect interest and rent
Those with insufficient Capital borrow and pay interest and rent
This accounts for growing inequality, it is the way the system works.
Trickle-down QE plus trickle-up inferstrukture is going to squeeze the Middle Class out of existence.