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The Fed's Financial Repression 'Game'

Tyler Durden's picture




 

The Grand Plan, as we have espoused for years, is to force all 'safe' assets to a point where they appear 'rich' to risk assets - and inflate another bubble to take our eyes off the debt being inflated away in the other hand. In the Fed's mind, they tried this before with QE1 and it worked magnificently - lifting stocks phoenix-like from the ashes of a credit-crunch reality. However, this time is different. The last time the Fed forced MBS CurCpn yields down to 'match' the S&P 500's dividend yield was March 2009 - and investors 'rotated' back to risk (to many people's surprise). Yields were at 4% then and the S&P's P/E multiple was 10x; this time yields are just above 2% and the S&P 500's P/E multiple is a staggering 14.9x. We suspect that rather than re-enacting the post-March 2009 eruption, valuations this time will force that liquidity to flood into non-equity asset classes (and with HY call-constrained, it leaves little but the energy and precious metals complex to soak up the Fed's exuberance).

 

The 8-Step Path to where we are...

1) Fed buys TSYs to fund deficit and keep government alive - under guise of maintaining rates low and performing extraordinary monetary policy out the curve (but there is a limit - see Japan)

2) Fed action pushes market to reach for yield - corporate credit sees huge technical demand, but valuations and call constraints will always limit gains...as well as leverage constraints holding new issuance back at some point.

3) QE1 impact remained the greatest - MBS-related repression to force the mortgage yield down to the S&P's dividend yield.

The lower pane shows the spread between the Current Coupon 30Y MBS yield and the dividend yield of the S&P 500 - notice the similarity to another period in time...

4) QEternity - try that again...but... yields were 4% then, now they are 2% and our balance-sheet-recession minds have changed behaviorally...

5) When it worked before S&P 500 P/E was 10x and was 'defensible' from a valuation perspective (to some) to rotate from MBS to stocks...

6) This time S&P 500 P/E is almost 15x!

 

7) The financial repression will continue until morale improves, but...

8) at these levels of valuation, we suspect non-equity asset classes will get the brunt of the liquidity flush (i.e. Gold/Commodities). HY remains call-constrained and while issuance is very high, there is a limit to just how much debt these firms will want to take on - no matter how cheap.

 

As we noted earlier, fundamentals will matter again at some point but the Fed expecting a pile in at 15x of the scale of the pile-in at 10x is insane - especially with the lower yields empirically setting average P/Es considerably lower (making the current P/E even more fantasy-like).

 

Charts: Bloomberg

 

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Tue, 09/18/2012 - 11:34 | 2807126 Snakeeyes
Snakeeyes's picture

The Fed has gone berserk. They are trying to reinflate the housing bubble ... again. And are just pumping air into the stock markets.

http://confoundedinterest.wordpress.com/2012/09/18/why-did-the-fed-do-qe...

Tue, 09/18/2012 - 12:06 | 2807276 dexter bland
dexter bland's picture

All these bubbles have been done too recently, don't know if the general pleblic will buy into them again so soon. Another solution (as Bill Gross recently alluded to) for retirees, leave your money in the bank and work until you drop.

Oh, can't find a job? Too bad.

Some questions for the better educated: Are shorts an "asset class"? If you short sell negative yielding bonds do you earn positive interest while holding? Could all this excess liquidity unleashed by QE actually be "invested" in selling the market?

Tue, 09/18/2012 - 12:42 | 2807450 LMAOLORI
LMAOLORI's picture

 

 

The general public for the most part can't get loans even with excellent credit it's next to impossible to get a loan for a home now. This isn't for the general public this is for big banks/investors/wall st/ it was planned months ago. Investor's are even using Eminent Domain to get homes for pennies on the dollar.

A Huge Housing Bargain -- but Not for You

snip more at link

NEW YORK (RealMoney) -- The largest transfer of wealth from the public to private sector is about to begin. The federal government will be bulk-selling the massive portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private investors -- vulture funds.

These homes, which are now the property of the U.S. government, the U.S. taxpayer, U.S. citizens collectively, are going to be sold to private investor conglomerates at extraordinarily large discounts to real value.

You and I will not be allowed to participate. These investors will come from the private-equity and hedge-fund community, Goldman Sachs (GS ) and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.

In the process, these investors will instantaneously become the largest improved real estate owners and landlords in the world. The U.S. taxpayer will get pennies on the dollar for these homes and then be allowed to rent them back at market rates.

On Wednesday, the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development (HUD) and the U.S. Treasury Department issued a Request for Information(RFI) concerning the disposition of the inventory of foreclosed homes owned by the federal government.

An RFI is ostensibly a way for the federal government to get input from the private sector on how to accomplish the goals laid out in the request. But that's really just a facade, as the RFI was structured by the investors to begin with.

related

Bernanke Buoys Big-Bank Stocks

Investors With Ties To Buffett, Soros, Obama Plan Mortgage Eminent Domain Grab

Distressed Home Prices Jump With Inventory Shrinking

Rally Building as Dealers Sop Up Supply: Credit Markets

Tue, 09/18/2012 - 12:19 | 2807351 Not Too Important
Not Too Important's picture

Not just the housing bubble. When it was announced the Fed would be buying MBS to infinity, there was no distinction made between CMBS and RMBS. They're buying up CMBS, too. This keeps the insurance companies afloat, as they are the largest provider of CMBS. Now, the insurance companies need that cash to pay claims, with little or nothing left to invest, so it looks like the Fed will also be supporting commercial real estate construction for some time.

The banks are broke, the insurance companies are broke, and the governments are in debt (both literally and with assumed liabilities) for hundreds of trillions of dollars/euros/yuan.

Our electoral systems are completely beholden to SCYTL. The Fukushima crisis is completely out of control, leaking lethal radiation continually for thousands of years with no containment whatsoever.

We are slowly grinding to a complete halt, with the world's lifeforms either dying of cancer or mutating themselves into extinction within a few decades, in abject poverty with global starvation.

Live accordingly.

Tue, 09/18/2012 - 12:35 | 2807421 Landotfree
Landotfree's picture

"They are trying to reinflate the housing bubble ... again."

The Fed's mission is to keep the global credit market system from collapsing as long as possible and to assist the system into reaching max potential before the collapse.  The Fed can not stop the collapse, all they can do is assist in delaying the collapse as long as possible.  

The Fed has been very successful in their mission, however the amount of power needed to sustain the system is more than which can be brought to bare, the Fed will continue to try and convince the sheeple the helicopters are coming until the last sheeple stops listening.

The Fed's success this time can be measure in the amount of body bags or land fills needed to fill with bodies in the collapse, last time 100+ million was needed, my guess 1-3 billion total will need to go.  If nukes are used you have probably closer to 7 billion potential unfunded liabilities that might be liquidated.


Tue, 09/18/2012 - 11:34 | 2807127 kralizec
kralizec's picture

"it leaves little but the energy and precious metals complex to soak up the Fed's exuberance"

Whaaa...nobody likes paper?

/

Wed, 09/19/2012 - 01:37 | 2809939 lewy14
lewy14's picture

You mean tissue paper? The exuberance soaking-up kind?

Tue, 09/18/2012 - 11:42 | 2807136 Cult_of_Reason
Cult_of_Reason's picture

I have been thinking the same, but when you watch CNBC and Bloomberg TV, everyone and his mother, and even the recent bears, are long now and pound the table the stock market is going higher because of the Fed and performance-chasing bandwagon.

Tue, 09/18/2012 - 11:40 | 2807146 Inthemix96
Inthemix96's picture

I really hope ben benernkank can sit across from his kids at the dinner table and tell them he is a good and honest man.  I hope he can look them in the eye and describe what he is bringing to the world with his money printing.

I hope and pray this piece of flotsam on humanity never gets another good nights sleep again.

And I do really hope, when the time comes, when he is dragged kicking and screaming from his home, when the mob catch him and hang him for the dog he most certainley is, he has a little time to reflect just how much damage he has caused.

Zionist cunt.

Tue, 09/18/2012 - 11:40 | 2807147 JPM Hater001
JPM Hater001's picture

(making the current P/E even more fantasy-like)

There you have it.  The markets are now officially Historical fiction

Tue, 09/18/2012 - 11:41 | 2807154 LawsofPhysics
LawsofPhysics's picture

So, what you are saying is that we are in the "plunder the treasury" part of the business cycle.

Tue, 09/18/2012 - 11:44 | 2807160 icanhasbailout
icanhasbailout's picture

Nah, that was 30 years ago.  We're in the "steal everything that's not nailed down and invest in claw hammers for the next round" phase.

Tue, 09/18/2012 - 12:15 | 2807323 Umh
Umh's picture

What treasure! There isn't any treasure in the treasury.

Tue, 09/18/2012 - 11:42 | 2807155 Sofa King
Sofa King's picture

Problem shows up when every clown with a CFP after his time tries to lock in profits for the year, all at the same time, and all the same equities. Fun times ahead.

Tue, 09/18/2012 - 11:43 | 2807157 Manipulism
Manipulism's picture
Rockefeller Global Tentacles Exposed in 1959 by the Soviet Union Wayne MADSEN | 15.09.2012 | 00:00  

 The Rockefeller global oil and banking empire has been the subject of much critical commentary on the Internet. However, the Rockefeller Octopus’s tentacles into every facet of America’s banking, oil (through their control of Standard Oil), military, educational, and foreign policy apparatus was exposed in a monograph prepared by the Soviet Union in 1959. An English translation of the Soviet article prepared by the Central Intelligence Agency’s Foreign Documents Division and dated December 16, 1959, was uncovered from the CIA’s archives. The paper is titled: “About Those Who Are Against Peace.”

The arguments in the Soviet paper generally concur with President Dwight Eisenhower’s Farewell Address to the American people shortly before the inauguration of President Kennedy in January 1961. In his speech, Eisenhower warned the American people about the dangers posed to America’s democracy by the “military-industrial complex.”

There is nothing in the Soviet paper that rings false about the Rockefellers… The oligarchic family has exercised control over America’s foreign policy through their part-sponsorship of the Council on Foreign Relations, Trilateral Commission, and Bilderberg Group – all three shadowy organizations of the world’s elite class who determine monetary, foreign, and military policies behind closed doors. Rockefeller funding of Columbia University and the University of Chicago have helped inflict on the United States some of the most brazen neo-conservatives serving inside and outside of government.

The paper states “In 1957, the Rockefeller oligarchy of American oil industrialists controlled a capital of 61.4 billion dollars. The precise size of the Rockefeller fortune is a state secret in America: the American press noted at one time that special measures are taken so that data concerning the largest fortunes of the U.S. are not published.”

Fifty-three years later, the fortunes of America’s elite are still secret as can be seen with the secrecy surrounding Republican presidential candidate Mitt Romney’s taxes and his offshore financial holdings in such locations as the Cayman Islands, Switzerland, Bermuda, and, according to some reports, the British Virgin Islands.

But the Rockefellers wrote the book on hiding their immense fortune in corporate contrivances and secret bank accounts, an easy task considering they own Chase Manhattan Bank, which is now known as J P Morgan Chase.

The Soviet article also exposed the Rockefellers’ much-ballyhooed “philanthropy” and “work ethic.” The article revealed: “The Rockefellers do not buy yachts worth many millions, like the Vanderbilt magnates; they do not install doorknobs and water fountains of pure gold in their palaces. But love for luxury is not alien to them. The play house where the children of the Rockefellers frolic cost a half million dollars. Bourgeois newspapers, willingly ‘forgetting’ about such ‘trifles,’ relate with tears of sympathy how the children of the billionaires earn pocket money by raising rabbits, cleaning boots, and even destroying flies at ten cents per hundred.”

Today, the successors of the same “bourgeois” media of 1959 prattle on about how Mitt and Ann Romney had it so “tough” after graduating from college. CNN’s Anderson Cooper, the son of billionaire heiress Gloria Vanderbilt, goes on about how tough it was for him to break into the news media, as if his mother had nothing to do with his rapid ascension in the corporate media.

The Soviet paper paints a picture of the Rockefellers that is similar to today’s Romney family: “The people want to know the truth. And the truth about the wealth of the Rockefellers consists of dark deeds, thousands of ruined families, hundreds of thousands of workers in many countries of the world tormented by work beyond their strength. The truth is the concealed history of many wars – it is oil stained with blood.” Of course, today the same can be said about the Rockefeller-linked Bush family, as well as Dick Cheney, George Soros, Rupert Murdoch, and the Rothschild family.

The article identifies the Rockefeller clan members in 1959: “John D. Rockefeller II does not direct his wide empire alone. He has five sons – John D. III, Laurance, David, Winthrop, and Nelson. They are all large capitalists. Each has his role, his department. Only Winthrop has not become famous for anything, unless one counts a scandalous divorce.” In fact, Winthrop became famous later when he was elected governor of Arkansas in 1966. His brother Nelson had served as Governor of New York since 1959.

David is the only survivor among John D. II’s sons and he has been a major player in secret organizations like the Bilderbergs and Trilateralists. David Rockefeller’s off demeanor is described in the Soviet article: “The bourgeois press advertises him as the owner of the best collection of insects in the world, and as possessing extremely gentlemanly manners. But when he enters the office of the bank [Chase Manhattan] and the steel doors close behind his back, the lover of butterflies turns into a greedy seeker after dollars. The hired biographers have every basis for calling him ‘the personification of the virtues of Wall Street.’”

Nelson Rockefeller, who, in 1975, would have become President of the United States had two attempted assassins’ bullets hit their target – President Gerald Ford – is recognized in the Soviet article for his scheming in Latin America, scheming that was supplemented by Richard Nixon and Ford Secretary of State and Rockefeller consigliore Henry Kissinger. The article states: “The Rockefellers have long nourished an irresistible attraction for the countries in Latin America: the provocatory smell of oil reaches them from the South American continent. Therefore, Nelson Rockefeller, who had long been trying to turn South America into his family estate, was at one time placed at the head of the so-called “Bureau of Inter-American Affairs.”

The article quotes the left-wing newspaper the Daily Compass, which once published the muckraking columns of investigative journalist I. F. Stone, in describing the Rockefellers’ stranglehold over the U.S. State Department: “The policy of the State Department is born in the offices of Standard Oil. From there it is transmitted to the Department of Defense, where the heads of the Army and Navy approve it. When this policy gets to the State Department, it becomes the policy of the government and is supposed to be confirmed by Congress quickly and without any changes whatever. When an order for laws designed to protect the interests of the oil kings comes from the Rockefeller dynasty itself, the entire Congress – from the small to the great – comes to ‘attention’ and does what the bosses order it to do.”

Considering the recent U.S. and NATO intervention in Libya and Syria, countries where oil is key, little has changed in how U.S. foreign and war policy is manufactured.

The Rockefellers ties to the CIA and Israel’s Mossad are also laid out in the Soviet monograph. The article reveals that the Rockefellers supplied a U.S. intelligence “cut out” – the School of Eastern Studies in Jerusalem – with money from the Arabian-American oil company (ARAMCO). The school, which operated with the full knowledge of the Mossad, trained American officers to conduct espionage throughout the Middle East.

There was a time when the U.S. government and the corporate (bourgeois) press dismissed such articles as the Soviet monograph on the Rockefellers as pure propaganda. In retrospect, the Soviet authors of the article understood in 1959 what many Americans have come late to fathoming: that the United States is being destroyed by a mega-wealthy elite intent on preying on the United States like a swarm of locusts.

Tue, 09/18/2012 - 11:47 | 2807172 LawsofPhysics
LawsofPhysics's picture

Many successful families have come before yours, they want their rent.  Stop whinning and pay up.

Tue, 09/18/2012 - 11:50 | 2807185 gwar5
gwar5's picture

The Dulles brothers were monsters.

Tue, 09/18/2012 - 11:48 | 2807175 LeisureSmith
LeisureSmith's picture

Platinum and Palladium took a dive just now, any news?

Tue, 09/18/2012 - 12:17 | 2807340 youngman
youngman's picture

Since Facebook is no longer the day traders playtoy...they have moved to commodities again...

Tue, 09/18/2012 - 12:37 | 2807437 LeisureSmith
LeisureSmith's picture

The S.A miners got mo monies, strike ended....good for them.

Tue, 09/18/2012 - 11:49 | 2807182 dariomilano
dariomilano's picture

..bullish?

Tue, 09/18/2012 - 11:54 | 2807201 GoldbugVariation
GoldbugVariation's picture

This: "lower yields empirically setting average P/Es considerably lower" makes no sense mathematically.  Low yields = high P/E.

Other than that, good charts in the article.

The basic message is that yield on MBS now matches dividend yield on equity, so rational investors will choose whichever they think offers (a) the least capital risk; (b) the greatest potential capital gain.

However, the FED will be directly buying MBS.  So their capital risk (assuming not held to full term) should be small.

 

 

Tue, 09/18/2012 - 12:16 | 2807331 credittrader
credittrader's picture

FYI - on P/E vs real rates... http://www.zerohedge.com/news/stocks-are-not-cheap

 

Tue, 09/18/2012 - 11:57 | 2807215 trebuchet
trebuchet's picture

with commodity oversupply coming, not much around cept for gold and property. 

 

Reit with a gold mine in the backyard, preferably defensible and in a politically stable environment.... where would one of those be.... 

Tue, 09/18/2012 - 11:59 | 2807231 gwar5
gwar5's picture

Jim Sinclair warns (again):

 

9) FED will confiscate private pensions and swap them with the paper on their books.

10) Confiscation of private gold

11) All you're future labor is belong to us, and it has been re-hypothecated, bitchez

 

Tue, 09/18/2012 - 12:53 | 2807487 No Euros please...
No Euros please we're British's picture

Hey, sounds good to me! Rehypothecate my labour, I guess that means 100 other guys do my job and I get to stay at home. Would solve the unemployment problem, but just keep your hands off my pay cheque.

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