Via Mark J. Grant, author of Out of the Box,
“Money does not buy you happiness. However it will allow you to be unhappy in nice places.”
-The Wizard
In the past, for all other QE announcements, we saw the stock market rally, we saw Treasuries up and the results of a Fed ease were dramatic. Yesterday; not so much. It was a Ho-Hum with equities down slightly, Treasuries off almost a point and a quiet blah response. There are some that mark this up to the “telegraph effect” where everyone expected it and we got exactly what was expected but I am not so sure this is the correct assessment. The “telegraph effect” may be part of the answer but I don’t think it was all of it. In the first place the Fed reneged. I would say that is the correct word because they changed the fundamental postulate from zero short rates until 2015 to zero short rates that are now dependent upon other factors. These are a line in the sand for Inflation and an unemployment figure of more than 6.50%. There is no way around it; the Fed had promised one set of circumstances and in the middle of the game they changed the rules and so any reliance upon what the Fed puts out must be viewed with a skeptical eye. It may be true for a time or until it is less convenient but we just learned that what the Fed states cannot be counted on with any certainty and so much for the credibility of Mr. Bernanke. No one really wants to talk about this, of course, and no one wants to mention that the Fed Chairman has changed the rules of the game in the middle of the game but there you are; a backsliding Federal Reserve Bank whose statements are only crafted for the moment and future moments may be brief; we just don’t know. Apparently we have transitioned to a “whatever is convenient” policy at the Fed and we all should bear that in mind when assessing probable actions.
When money talks, nobody pays any attention to the grammar.
Forever and Ever?
I have never been married, the smart fellow that I am, but I do know that marriage has some “forever and ever” words as part of the ceremony. These, of course, actually do have limits as fifty percent of all marriages end in divorce and fifty percent end in death so that the concept has actual limits regardless of the premise. The world’s economies have been fostered and sustained since 2008 by the central banks of the planet working in tandem to make sure that the entire globe did not slide into the hellhole of Depression. To that extent the concept has worked but we are still on the lifeline to date and no one seems to want to get off of it. It is similar to a person being hooked on heroin with the inability to withdraw and so the habit continues. There are consequences of this behavior of course including irrational behavior, overblown promises and the increase of the risk that when withdrawal comes that the patient slips into convulsions. Those, however, are long term and systemic problems that will continue to haunt us but in the meantime more mundane issues abound.
Here is what the Fed has done to date in the Treasury market:
- In the 6-8yr. sector they have bought about 50% of the gross issuance
- In the 9-20yr. sector they have bought about 70% of the 10yr. gross issuance
- In the 24-30yr. sector they have bought 100% of the gross issuance
- In the MBS sector they are buying $45 billion a month all across the curve
The Treasury issues, the Fed prints money and buys, the cost of financing for the country is incredibly low and the yields for investors are paltry. The needs of The State overwhelm the needs of the citizens. The game works because this is what every central bank in the world is doing, one way or another, and so with no way to invest off-world, investors are stuck in the confined space that has been provided by the central banks. All of the new money buoys the equity markets, causes massive compression in the other Fixed Income markets besides Treasuries, decreases the yields of Treasuries the trend is set firmly in place. In the risk markets there will now be a demand as instigated by the Fed, that overwhelms the supply of new issuance. Between the coupons paid and the maturities for 2013 the figure is about $1 trillion in excess demand more than estimated forthcoming supply. Given the 36% loss in wealth that took place in America during the 2008/2009 period the odds of an asset allocation shift out of bonds and into equities is de minimis in my opinion and so the “Great Compression” will continue.
“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”
-Adam Smith
Buy as far out and with any credit you can stomach and you will win this game for the time that it exists. Buy anything with a discount and anything that throws off a decent yield and you will be rewarded for your savvy good sense. There will be a moment when the battleships, the star cruisers, the aircraft carriers who are the huge money managers will have to turn on a dime or hedge up their positions in some fashion but we are not there yet; not anywhere close to there yet. Now the money flows, the coupons pay, bonds mature, the supply of new issuance is limited and bought up by the Fed in Treasuries and Mortgages and the balance sheet at the Fed grows to equal the ECB at $4 trillion and the present day artifice prevails.
“Giving money and power to governments is like giving whiskey and car keys to teenage boys.”
-P.J. O'Rourke