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Mom And Pop "Will Probably Get Trampled": Alliance Bernstein Warns On Bond ETF Armageddon
Right up until China threw the financial world into a frenzy by devaluing the yuan right smack in the middle of a stock market meltdown that Beijing was struggling to contain, bond market liquidity was all anyone wanted to talk about.
Of course we’ve been talking about it for years (literally), as have a few of the sellside’s sharper strategists, but earlier this year the mainstream financial news media caught on, followed in short order by the rest of the Wall Street penguin brigade, and before you knew it, even the likes of Jamie Dimon were shouting from the rooftops about illiquid corporate credit markets.
The problem, in short, is that the post-crisis regulatory regime has made dealers less willing to warehouse bonds, leading to lower average trade sizes, sharply lower turnover, and a generalized lack of market depth. That in turn, means that trading in size without triggering some kind of dramatic move in prices is more difficult.
But that’s not the end of the story.
Seven years of ZIRP have i) herded yield-starved investors into riskier assets, and ii) encouraged corporates to take advantage of voracious demand and low borrowing costs by issuing more debt. The rapid proliferation of ETFs and esoteric bond funds has encouraged this phenomenon by giving investors easier access to corners of the bond market where they might normally have never dared to tread. These vehicles have also given investors the illusion of liquidity.
Ultimately then, the picture that emerges is of an increasingly crowded theatre (lots of IG and HY supply and plenty of demand) with an ever smaller exit (dealers increasingly unlikely to inventory bonds in a pinch).
With that as the backdrop, we bring you the following excerpts from a new paper by Alliance Bernstein:
We agree that low liquidity is a risk—but by focusing on regulations, we think most investors are underestimating the gravity of that risk. While new regulations have contributed to the problem, there are sev- eral less obvious causes that have the potential to make the liquidity crunch worse.
Some stem from global central bank policies: easy money has driven government bond yields to record lows and forced yield-hungry small investors to crowd into the same trades. Another driver is caution by large institutional investors, who are less and less willing to take the long view in bonds and ride out short-term market volatility.
While regulatory changes have reduced the supply of liquidity, these trends have drastically increased the potential demand for it. None on its own is likely to trigger a major market crisis. But taken together, they’re creating a lot of dry tinder. And the next shock to hit markets— that prompts everyone to sell—might be the spark that sets every- thing ablaze. With volatility in fixed-income markets rising, investors can’t afford to take this risk lightly.
And here’s some further color on central banks’ role in creating these conditions (note the bit about what happens when markets that are driven solely by central bank liquidity suddenly reverse course):
When liquidity evaporated in 2008, central banks worldwide stepped in to provide it by slashing interest rates and eventually buying huge amounts of government bonds. These were emergen- cy policies, for use in an emergency. They were designed to flood the financial system with money, encourage risk-taking and get the economy moving again. Investors responded as policymakers hoped they would—by charging into riskier assets to earn a decent return.
If rallies are being driven by central bank liquidity rather than fundamentals, it follows that sell-offs should be, too. In fact, over the past two years, markets have undergone a series of sell- offs—one might call them miniature fire sales—in which bonds, stocks, commodities and other assets have all declined. None of these episodes have lasted as long or done as much damage as the sharply correlated declines in 2008—at least, not yet. Still, the pattern is disturbing.
Ironically, central bank policies that were applied with the best intentions and designed in part to boost liquidity are helping it to dry up. These easy money policies aren’t over yet. But with the Federal Reserve likely to raise interest rates later this year, the beginning of the end is in sight.
Finally, here's a bit more on the relationship between reduced dealer inventories, increased access to the bond market for "mom-and-pop", ETF liquidity, and what happens when someone yells "fire":
While banks have been retreating from the bond market, investors have been charging into it. This is a direct result of central banks’ easy money policies: by driving interest rates to record lows, these policies pushed investors—even income-starved mom-and-pop investors—into riskier assets, such as high-yield bonds and emerging-market debt, to earn a decent return. In 2014, retail-oriented mutual and exchange-traded funds owned nearly 23% of the US high-yield market, up from 15% in 2006. Retail ownership of investment-grade bonds more than doubled over the same period.
The result: large numbers of investors are crowded into the same trades. That causes prices to trend strongly in one direction, but may leave the market vulnerable to a sudden correction if everyone wants to sell at once.
The fact that small investors are playing a bigger role in these mar- kets is important, because they tend to move into and out of assets often, depending on the latest headline or price trend. In recent years, investors have charged into—and out of—various assets, including high-yield bonds and emerging-market debt, with alarming frequency (Display 4).
What’s more, a great many investors—and we suspect this even goes for some large ones—are venturing into riskier corners of the credit markets because central banks’ low-interest-rate policies have made it hard for them to find income elsewhere. Many are taking on more risk than they ordinarily would. When interest rates start to rise, government bonds or even cash may suddenly look more attractive, potentially causing a rush for the door.
In theory, investors can exit an open-ended mutual fund or an ETF at will. But the growing popularity of these funds forces them to invest in an ever larger share of less liquid bonds. If everyone wants to exit at once, prices could fall very far, very fast. A lucky few may get out in time. Others will probably get trampled.
Note that the last passage there is precisely what we began warning about earlier this year and indeed, the relationship between retail flows, ETFs, and shriking dealer inventories was recently the subject of a live debate between Carl Icahn and Larry Fink during which Icahn called BlackRock a "dangerous company" for providing the vehicles through which investors have been allowed to crowd into bonds.
For an in-depth look at what we've called "ETF Phantom liquidty" see our complete guide here, but for now, recall that as Howard Marks warned earlier this year, an ETF "can't be more liquid than the underlying and we know the underlying can become quite illiquid." This means that in the event flows into HY (or any other type of fund for that matter) suddenly become largely non-diversifiable (i.e. unidirectional), fund managers will either need to meet redemptions with borrowed cash or else venture into the illiquid markets for the underlying bonds and risk tipping the first dominoe on the way to a firesale.
With that, we'll close by reiterating the fact that no fund manager in the world will be able to line up enough emergency liquidity to avoid tapping the corporate credit market in the event of panic selling in the increasingly crowded market for bond funds. In other words, when the exodus comes, the illiquidity that's been chasing markets for the better part of seven years will finally catch up, and at that point, all bets are officially off.
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(Most) Mom and Pops left town 7 yrs ago didn't come back
OT: This woman shoots from the hip!http://www.wacotrib.com/news/police/loaded-gun-pulled-from-woman-s-vagin...
Tell m0m & p0ps to get fuct and buh Bitcoin!
would you actually tell your parents to buy that crap with their savings?
Yeah, the most technically advanced currency in teh history of man is "crap" according to some ZH goof moron lol...
Bit coin founded 01/2009
gold founded (for transaction) over 5,000 year ago est.
one is on the periodic table of elements,
one is a notional value on a circuit board.
I think there maybe transactional value in crypto coin/currencies, but not to be compared with a completely different entity/object.
time is not on Bitcoin's side,IMHO.
Ya, very bright idea... when researching emerging technologies always make sure they are at least 5,000 yrs old. Lulzing at morons....
Hey dude, move out of your parent's basement... they're really getting annoyed and need their personal time. I'm sure there are PLENTY of places out there that take Bitcoin for rent. Hell, I know when I go to my butcher shop to get a nice fat prime filet to grill they proudly accept bitcoin... as well as Litecoin, Maxcoin, and all of the other future monies (http://coinmarketcap.com/).
And before you answer, no, they don't take gold or silver yet... It's called propaganda.
...ah yes, only "propaganda" when it's applied to teh metals and not crypto? And btw (speaking of basements)... there were also lots of other tards like you guys filling their basements with silver and canned beans throughout the 1970's. Not only did they miss the collapse by about half a century, they also probably missed some of the greatest tech innovation in history over the next few years and massive amounts of profit.
Fonestar tricked DuChungRollerBearings into buying a shitload of BTC when it was trading $1000+.
Poor kid committed suicide when it fell back down to $200. I never heard from him again.
Don't get caught on the wrong side of the "Zero". lol.
Hey coinhead, nice try trying to "pump" yer worthless bits. I know who you are. Hi.
And wasn't that interesting how the hacker/ theif who stole almost a million$ in bitcoins turned out to be a fed/ NSA spook?
Hmmm... bitcoin is so encrypted & private. Sure it is. Unless ALL your email and keystrokes are being recorded by some entity.
http://www.theguardian.com/technology/2015/sep/01/us-federal-agent-inves...
PMs have no password, care not about power outages & are immune to viruses.
is this fone/gh0at? missed your trolling
Picture muh trollin'
Look at me! I'm so libertarian. I go to black hat to post about it on FB. Pffft.
ehe...
that must be the reason that after 7 years, your "currency" is only used for laundering money and by a small group of speculators who control 80% of that "currency".
Almost everybody who buys bitcoins does so to make money. And not use it as a currency.
Nobody would trust a currency that flip flops 30, 40, 50% in a month in every direction.
The only defense the bitcion boys have it that everybody who's not with it must be a enemy.
And bitcoin is nothing new, it fully uses the concept of the templar knight money system.
"Since they weren't allowed to charge interest, they charged rent instead."
That rent, is the fee you pay to get money in and out of the system.
And the payment system was also with a personal code that allowed a deposit on one side of the world and a withdrawl on the other side.
It failled bigtime. Once the system went down after the invasion of Jeruzalem, all that money was gone.
Oh now Bitcoin is related to the Knights Templar money system? Does teh idiocy here never stop or take a break? Bitcoin will continue surging in dollar terms (with lots of 75% corrections and crashes), which is all very useless seeing as how we will also see seven digit prices on turnips soon. Point is, that Bitcoin survives and teh "dollar" does not. Just like the complete and total morons who said personal computers were "a fad" in teh early-mid 1980's (we was 11yrs old and we figured out that computers were going to take over the world) the ZeroBrain idiots will be left eating humble pie.
Rules for valuing assets
1. Must be able to touch, stand on, swim in, or hold on to.
2. Must have an established perceived value and acknowledged rate of exchange.
3. Must be able to defend and protect from theft.
4. Must be easily broken into partial pieces for smaller transactions
5. Must not change in physical composition or physical state in daylight, night, cold, rain, or any other standard condition.
6. Must have a proven track record over eons during good times and collapse of various civilizations.
Items that fit this category are PM, Pb, firearms, land, water, food and in some cases skills that very few possess.
Under no condition during a collapse do binary combinations on a circuit board meet these criteria
Oh fuck your stupid "collapse".... there's gonna be a great party going on somewhere on planet Earth while you're dying in a shoot-out with teh Feds.
"Nobody would trust a currency that flip flops 30, 40, 50% in a month in every direction."
Or even 3, 4, 5% if you manufacture for the world.
China interest in bitcoin is well known.
1 week 1 day is shillin' for Blythe
Bitcoin is Blythe's worst nightmare dipshit...
ahhh, the ol pistol in the snatch or as we call it at Langley, the "Snistol"
I would have thought "Pusstol"
Backstage we're having the time
Of our lives until somebody said
Forgive me if I seem out of line
And she whipped out a gun and tried to blow me away......
From "Phantom Liquidity" to "Phantom 401(k)"!
Milton Churchill
Yep. TLT
there you go... ...of course when bonds die, so do governments...
LOL! Some "mom and pops" are long gone, most don't give a shit, while others still are very well prepared and long guillotines...
unless this guy is buying bonds no one is:
AB is full of crap methinks.
1) they don't give a fuck about mom and pop
2) they loved the bailouts
3) they disingenuously gripe about the fed
4) they gripe about regulations. eat shit and die.
5) they love zirp and qe
fuck them and the horse they rode in on.
Those bailouts make their lords uber rich. Off course they'll keep QE going. Greed always wins.
Bingo. I know some very wealth VC guys, yes, they love QE and ZIRP/NIRP. I have asked them point blank about capital and resource misallocation and they flat out ignore me or simply say "it won't matter because I already have a private island or plantation etc."
they really are this arrogant and it really will require blood to change things, lots of blood.
same as it ever was...
If derivatives are weapons of mass destruction than ETF's are the delivery system.
IF those ETF's actually hold the stocks they claim to own because like gld and slv, they own shit.
Makes me wonder if those EFT also own 1 stock against 200 claims just like in gold.
Some, maybe all, of the brokerages don't even buy the stocks people put orders on. They just even out the buy/sell sides. Wouldn't surprise me if people started wanting certificates we find out nobody owns shit. All a big paper game.
The only way to use ETF's is to play the options, no way would I actually buy and hold one of those turds.
We had our first 20% correction, it now all depends on Rate hikes or QE4
And if the FED doesn't step in to save the market, their 4 trillion portfollio will then need to be marked down by about 50%. Let's not forget they hold the crappiest shit out there so 50% is a optimistic view.
But if they step in, they'll need to also lower rates into negative territory.
I wouldn't want to be the one calling the shots now because whatever they do, there's always strings attached and wel... they're fucked.
And America should prepare for it just as all the petrodollar allies already did.
And when the reserve currency goes negative in rates, god help us all because then the entire west will bleed it's wealth untill there's nothing left.
And if the would raise rates and delay QE, imagine how weak the economy is that it can't een carry a 0,25% rate...
that number is still terribly weak and you can't defend such a low rate with a crashing stockmarket.
20% correction? I missed the second half of that. Mom/pop not worried, it will all come back....it always does, even if it means moar cb intervention. What they don't see are the cb's inflating their 401 away.
...but they told me inflation was under the magical 2% bogey.
Please tell me you aren't suggesting my government would lie to me?!?
The exit to the picture theatre is getting narrower and narrower. My guess is that when the stampede to the ext commences it will in fact be closed by the puppeteers.
And what people fail to realise is that a bank holiday and trading restrictions all amount to one thing......a haircut.
The US can't haircut when it's under real threat to it's hegemony. In fact... You might say unwinnable threat.
Indirectly that is what is meant by my last sttement. Even though a hircut might not be actually effected the surrounding circumstances will make it feel like one.
The US might currently havevthe best printing machine in the orld, the problem is that the structure in whichit is housed is becoming ever more unstable and flammable.
Really enjoyed this article thanks!
Where's WB7 with a portrayal of a herd of bears trampling Kermit the muppet when you need him?
Prolly asleep, he didn't get much rest after that bender he pulled with Amanda.
Feminists are already doing it.
http://libertyunyielding.com/2015/09/03/tweet-of-the-day-feminists-angry...
There is going to be a lot of roadkill over all the ETFs. Unless they contain high volume big stocks, destroying the unit when folks sell it back to the sponsor it going to be a disaster.
The fact that small investors are playing a bigger role in these markets is important, because they tend to move into and out of assets often, (fail)
(meanwhile HFTs are in and out a thousand times)
depending on the latest headline or price trend. In recent years, investors have charged into—and out of—various assets, including high-yield bonds and emerging-market debt, with alarming frequency.
Muppet food
The sheep had their chance to run.
fuck'm
Mom and pop have lived under and supported a system of enforced frauds for decades and never recognized it for what it is. They still vote thinking party politics matters. Sorry but,...this is a long overdue comeuppance for many seniors who've never understood the impact of their complicity.
Told my parents to get out, 'But isn't that what happens when people sell, it goes down further?' They want to play the market as altruistic collectivists.
pensions.
Mom and Pop Bitcoin investors will not suffer like those risky bond holders because they trade daily to insure their futures. They convert their profits to gold, silver, long term food storage and ammo.
Here is the "Central Plan": "While banks have been retreating from the bond market, investors have been charging into it."
Controlled demolition; where are those so-called military heroes that are suppose to defend ALL enemies; rather than chasing the bogie-man terrorist; they need to round up the Pentagon, the Congress and that Kenyan and have a public trial for them all and throw in Trump for good measure.
During previous rising rate periods (2004 to 2006, 14 rate hikes from 1.25% to 5.25%; 1999 to 2000, 4 hikes from 5.00% to 6.50%; 1994 to 1995, 7 hikes from 3.25% to 6.00%; and 1986 to 1987, 4 hikes from 5.875% to 7.25%). I expect to see the following:
Actual and expected price volatility will rise (interest rates, equities, US dollar)
Treasury yields will rise and prices will fall
Yield curve flattens (shorter maturity yields will rise faster than longer maturity)
Credit spreads widen (mortgage/corporate bond prices fall faster than Treasuries)
I also expect market rhetoric to change from “If and when the Fed will hike” to “Oh my God, will they ever stop raising rates?” and “When will the Bank of England, the ECB and the Peoples Bank of China start raising rates?”
....and in an equity decline, even moreso than a bond one, ETFs will be the last place you want to be as you are given "scrip" - rapidly declining individual stock shares - instead of cash.
My trading footprint now is smaller than it once was, and it's great because there's a tangible value in being nimble. Coming up, you can either hunker down with the investments you love, or be nimble and cash in on all the opportunities the behemoths are throwing off. HFT front runners won't be a big an impact, they're liquidity takers and their models hate when execution risk gets too great for them, that's why they run away. Limit your trading/risk portfolios to under $50 million and have fun!