Jump to content
House Price Crash Forum
ParticleMan

Qe2 - Holed At The Waterline

Recommended Posts

As I've suggested in previous threads, QE1 has been largely financed by looting large, passive pools of capital - force-feeding low yield (and low quality) gilts in ever encreasing quantities to the fois gras goose that the modern pensions industry has become.

It's worth noting that since May, the resulting yield slump has now moved from the five year maturities into the ten year.

This one simple fact tells us that even these large capital pools can no longer buy the short-dateds - that even their models are indicating too much risk for too little reward holding liquid, cash-like instruments.

However - the erosion of yield (itself due to Reserve price controls on state and private sector debt) coupled with the specific regulations under which this sector operates, turbo-charged with basic demographics against "life-style" investment allocation models, recent price volatility, and the natural aversion of those approaching retirement for same... all of this means that the lemming-like behaviour which lead to funds buying strongly in the one to five year maturities will force them to now bid with equal strength in the mid and long dateds.

Unfortunately the capital available to do so is virtually non-existant (it's fully invested, in the short end - and the rate of new contributions has fallen off a cliff).

Shortly, these funds will face a stark choice.

They can liquidate the short end and buy mid-dateds instead inverting the yield curve in the process.

Or.

They can liquidate equities sending the ever-sacred indicies crashing.

Both scenarios will trigger additional government intervention (additional price controls).

The intervention will force the funds to accelerate their progress along whichever path they ultimately choose.

In short, these scenarios will play out much more quickly than any Reserve is currently forecasting - none of them (as far as I can see) show any sign of understanding their own causal role in all this.

And it will leave us all the poorer for it (any capital invested in "risk-free" instruments in this phase will be destroyed - and with it unavailable for risk-taking activity in the next phase, innovation hence productivity hence real growth flattens, worsening and lengthening the depression we now face).

The regulators, of course, are equally myopic - politicians world-wide appear convinced that given their previous round of price controls "worked" (it's getting easier to auction debt - even state debt!) - that all they need do is apply more of the same.

Volatility options of all types (commodities, stocks, foreign exchange, etc) all look vastly underpriced to me (I think Mr Taleb is going to have a very good year).

And trading strategies built with specific, historically modelled volatility bands in mind are extremely likely blow up - as liqudity continues to leave the system apace.

Share this post


Link to post
Share on other sites

Volatility options of all types (commodities, stocks, foreign exchange, etc) all look vastly underpriced to me (I think Mr Taleb is going to have a very good year).

I'm glad to see you write this, to me this is the low hanging fruit of the year. Those option pricing models look flawed.

Share this post


Link to post
Share on other sites

As I've suggested in previous threads, QE1 has been largely financed by looting large, passive pools of capital - force-feeding low yield (and low quality) gilts in ever encreasing quantities to the fois gras goose that the modern pensions industry has become.

It's worth noting that since May, the resulting yield slump has now moved from the five year maturities into the ten year.

This one simple fact tells us that even these large capital pools can no longer buy the short-dateds - that even their models are indicating too much risk for too little reward holding liquid, cash-like instruments.

However - the erosion of yield (itself due to Reserve price controls on state and private sector debt) coupled with the specific regulations under which this sector operates, turbo-charged with basic demographics against "life-style" investment allocation models, recent price volatility, and the natural aversion of those approaching retirement for same... all of this means that the lemming-like behaviour which lead to funds buying strongly in the one to five year maturities will force them to now bid with equal strength in the mid and long dateds.

Unfortunately the capital available to do so is virtually non-existant (it's fully invested, in the short end - and the rate of new contributions has fallen off a cliff).

Shortly, these funds will face a stark choice.

They can liquidate the short end and buy mid-dateds instead inverting the yield curve in the process.

Or.

They can liquidate equities sending the ever-sacred indicies crashing.

Both scenarios will trigger additional government intervention (additional price controls).

The intervention will force the funds to accelerate their progress along whichever path they ultimately choose.

In short, these scenarios will play out much more quickly than any Reserve is currently forecasting - none of them (as far as I can see) show any sign of understanding their own causal role in all this.

And it will leave us all the poorer for it (any capital invested in "risk-free" instruments in this phase will be destroyed - and with it unavailable for risk-taking activity in the next phase, innovation hence productivity hence real growth flattens, worsening and lengthening the depression we now face).

The regulators, of course, are equally myopic - politicians world-wide appear convinced that given their previous round of price controls "worked" (it's getting easier to auction debt - even state debt!) - that all they need do is apply more of the same.

Volatility options of all types (commodities, stocks, foreign exchange, etc) all look vastly underpriced to me (I think Mr Taleb is going to have a very good year).

And trading strategies built with specific, historically modelled volatility bands in mind are extremely likely blow up - as liqudity continues to leave the system apace.

Is this what you think explains Japan's predicament?

Share this post


Link to post
Share on other sites

Is this what you think explains Japan's predicament?

government reflation explains Japans inability to escape the BUST. They also havent allowed liquidations.

they have done everything to try and maintain a boom...and the hill just keeps getting steeper.

Share this post


Link to post
Share on other sites
Is this what you think explains Japan's predicament?

It certainly hasn't helped.

The self-inflicted ZIRP regime has ensured that Japan's trade surplus has been invested (hence, productivity growth has occurred) overseas.

They haven't, of course, had issues with price volatility (until more recently) - they've been shouting into a vacuum as it were, the global credit binge has been doing for them (for price levels in Yen denominateds) what Reserves world-wide have been attempting to do for the last year or so.

Even I'm starting to be astonished at where the new normal in Fx crosses (trading ranges) is going these days...

Share this post


Link to post
Share on other sites

snip

QE cements in a basic mismatch in affordability between mortgages and pensions and peoples' wages. A short term palliative to save the banks with long term consequences for society.

of course...that is THE task of central banks...to save private banks and provide them with an earning opportunity.

Share this post


Link to post
Share on other sites
I'm not sure that inverting the yield curve in this way necessarily means a recession will be triggered.

At the moment the ten year is around 2.5 and the three month about 0.15.

With state deficits the size they are, if funds are forced to trade out of the short end, the three month rates will rise to meet the ten year - and probably, pass the long bond in the end.

This creates a situation that should never exist - risk free instruments, carrying rollover risk.

It won't create a recession.

It'll merely (and belatedly) signal the depression we're already* in.

(* I don't know what planet the NBER are on, or what they're smoking)

Edited by ParticleMan

Share this post


Link to post
Share on other sites

I should say I didn't mean to reply in a way that could be misconstrued along the lines of grandmothers and eggs. Just wanted to do a little bit of explaining re yields curves for people who don't know about them.

And I agree with you potentially that if normal pricing signals were allowed to operate they may well signal the depression you are talking about. I think we're still in the can and kicking stage though.

for the record..I dont ever understand particlemans articles, and I didnt understand your explanation either.

AFAIK...this is an issue of capital formation or savings....just not happening as they should be.....a sure sign the BUST is not over...as for yields, curves, and all the other trade language......

Share this post


Link to post
Share on other sites

As I've suggested in previous threads, QE1 has been largely financed by looting large, passive pools of capital - force-feeding low yield (and low quality) gilts in ever encreasing quantities to the fois gras goose that the modern pensions industry has become.

And trading strategies built with specific, historically modelled volatility bands in mind are extremely likely blow up - as liqudity continues to leave the system apace.

Good post particleman.

More here: http://www.dallasfed.org/news/speeches/fisher/2010/fs101007.cfm

Small wonder that most business leaders I survey, including small businesses, remain fixated on driving productivity and lowering costs, budgeting to “get less people to wear more hats.” Tax and regulatory uncertainty―combined with a now well-inculcated culture of driving all resources, including labor, to their most productive use at least cost―does not bode well for a rapid diminution of unemployment and the concomitant expansion of demand.

Of course, if the fiscal and regulatory authorities are able to dispel the angst that businesses are reporting, further accommodation might not even be needed. If job-creating businesses are more certain about future policy and are satisfactorily incentivized, they are more likely to take advantage of low interest rates, release the liquidity they are hoarding and invest it robustly in hiring and training a workforce that will propel the American economy to new levels of prosperity, rendering moot the argument for QE2. The key is to remove or reduce the tax and regulatory uncertainties that act as an impediment to businesses responding to an increase in final demand. I think most all would consider this to be a far more desirable outcome than being saddled with a bloated Fed balance sheet.

Basically, give the private sector the right incentive and certainty to expand & create useful things ( not 51% tax, arbitrary £44k cut off on child benefit) will lead to prosperity. Printing money won't (else previous government would have figured this out). (and neither will asset / HP speculation)

Edited by easybetman

Share this post


Link to post
Share on other sites
They can liquidate the short end and buy mid-dateds instead inverting the yield curve in the process.

Why isn't this self-correcting then?

Short yields become more attractive again.

Share this post


Link to post
Share on other sites

Why isn't this self-correcting then?

Short yields become more attractive again.

QE I suppose.

Share this post


Link to post
Share on other sites

wrong thread, and totally out of order....but....:lol:

It's spam. New poster, identical URL in five different posts.

(yeah, I thought x-quork too from the name, but it's either a coincidence or good passing-off).

Share this post


Link to post
Share on other sites

Why isn't this self-correcting then?

Short yields become more attractive again.

Either way, pension yields are decimated. Annuity rates have already halved, and the demographics of retiring boomers puts further downward pressure on even without government policy trashing them.

What intervention has done is to consolidate the Equitable verdict: protect existing pensioners rights at the expense of working people - especially those nearing but not reached retirement.

Share this post


Link to post
Share on other sites
As I've suggested in previous threads, QE1 has been largely financed by looting large, passive pools of capital - force-feeding low yield (and low quality) gilts in ever encreasing quantities to the fois gras goose that the modern pensions industry has become.

It's worth noting that since May, the resulting yield slump has now moved from the five year maturities into the ten year.

This one simple fact tells us that even these large capital pools can no longer buy the short-dateds - that even their models are indicating too much risk for too little reward holding liquid, cash-like instruments.

However - the erosion of yield (itself due to Reserve price controls on state and private sector debt) coupled with the specific regulations under which this sector operates, turbo-charged with basic demographics against "life-style" investment allocation models, recent price volatility, and the natural aversion of those approaching retirement for same... all of this means that the lemming-like behaviour which lead to funds buying strongly in the one to five year maturities will force them to now bid with equal strength in the mid and long dateds.

Unfortunately the capital available to do so is virtually non-existant (it's fully invested, in the short end - and the rate of new contributions has fallen off a cliff).

Shortly, these funds will face a stark choice.

They can liquidate the short end and buy mid-dateds instead inverting the yield curve in the process.

Or.

They can liquidate equities sending the ever-sacred indicies crashing.

Both scenarios will trigger additional government intervention (additional price controls).

The intervention will force the funds to accelerate their progress along whichever path they ultimately choose.

In short, these scenarios will play out much more quickly than any Reserve is currently forecasting - none of them (as far as I can see) show any sign of understanding their own causal role in all this.

And it will leave us all the poorer for it (any capital invested in "risk-free" instruments in this phase will be destroyed - and with it unavailable for risk-taking activity in the next phase, innovation hence productivity hence real growth flattens, worsening and lengthening the depression we now face).

The regulators, of course, are equally myopic - politicians world-wide appear convinced that given their previous round of price controls "worked" (it's getting easier to auction debt - even state debt!) - that all they need do is apply more of the same.

Volatility options of all types (commodities, stocks, foreign exchange, etc) all look vastly underpriced to me (I think Mr Taleb is going to have a very good year).

And trading strategies built with specific, historically modelled volatility bands in mind are extremely likely blow up - as liqudity continues to leave the system apace.

Can I very crudely summarise this as saying that the pension funds are being looted and when done there will be nothing left in the cupboard? Or is this too simple?

Edited by wonderpup

Share this post


Link to post
Share on other sites

Can I very crudely summarise this as saying that the pension funds are being looted and when done there will be nothing left in the cupboard? Or is this too simple?

Almost.

But it's not so much your pension fund as the value of the annuity it'll buy when you retire.

The good news is, if you're under 40 this blockage should've worked its way through the system in time for your annuity rates to have recovered. The bad news, if you're fiftysomething you'd better not be relying on your assets.

Share this post


Link to post
Share on other sites
Why isn't this self-correcting then?

Short yields become more attractive again.

It's the falling knife problem, and it's two edged.

Firstly - at what point will the funds and other investors (who will suffer serious capital losses as the price of the short end falls in this scenario, losses magnified by the relatively poor yields being earned on those same holdings) decide the correction is complete and they can safely re-test the market?

Secondly - having been stripped of capital, what will they invest with?

Reserves worldwide do not comprehend that they can't loot the pensions industry a second time - with very few exceptions, all funds are fully invested, and all funds have both the wrong instruments at the wrong price and at the wrong part of the cycle.

Epic price control failure.

No wonder some in the industry are complaining about the signals they rely on being broken...

Share this post


Link to post
Share on other sites
Can I very crudely summarise this as saying that the pension funds are being looted and when done there will be nothing left in the cupboard? Or is this too simple?

Yes, but the thought has implications - these capital pools are how we gather our meager savings and direct them into risk taking endeavour.

This particular cupboard being bare means, in practice, that the concept of GDP growth (the concept of it becoming easier to gather a bellyful of rice each successive year) will seem like a fairytale to our children

Edited by ParticleMan

Share this post


Link to post
Share on other sites

Yes, but the thought has implications - these capital pools are how we gather our meager savings and direct them into risk taking endeavour.

This particular cupboard being bare means, in practice, that the concept of GDP growth (the concept of it becoming easier to gather a bellyful of rice each successive year) will seem like a fairytale to our children

ah well, they can always buy Greek or Irish Bonds...they pay quite a bit I hear.

And No, Printing never works.

Share this post


Link to post
Share on other sites

Yes, but the thought has implications - these capital pools are how we gather our meager savings and direct them into risk taking endeavour.

This particular cupboard being bare means, in practice, that the concept of GDP growth (the concept of it becoming easier to gather a bellyful of rice each successive year) will seem like a fairytale to our children

Much of it has been a fairytale for many years (which is, on one level, precisely why we have a problem).

To some of us on the wrong end of boomer demographics it was visibly a fairytale in the 1980s.

Share this post


Link to post
Share on other sites
ah well, they can always buy Greek or Irish Bonds...they pay quite a bit I hear.

I know you're not being entirely serious but this touches on something I referenced earlier - rollover risk.

In the scenario where funds liquidate the short end and move to mid and long-dateds we will start to see rollover risk being an issue.

To put it another way, the funds the state has borrowed on the taxpayer's behalf are sufficiently large that successive parliaments will need to reborrow to service the shorter maturities (all of the bidding strength has thus far been at the short end - it has been far easier for market operations teams to finance the deficits at three month to two year maturities, because this is what these self same funds are buying).

If market rates at the short end rise, the repayment burden will actually increase - the state will be forced to refinance today's headache and offer far greater slices of its income (far greater proportions of the taxbase) to do so.

Some states have nothing left they can credibly offer - no more blood in the stone.

For investors already overweight in these issues, their risk-free holdings will essentially have no market value.

This is a whole new crisis - if a fund is attempting to match outflows of some say 25 year period (ie, an annuity product) against a currently overweight position in two year instruments (the assumption being that at maturity the funds will be rolled into a new, similarly short maturity)... if instead, prices collapse in the shorter maturities... the value of the fund (its claim on the economy) will vaporise far more quickly than any present estimate suggests possible (let alone probable).

It really doesn't take much of a fall in the price of a security yielding 0.15% (at the time of purchase), to result in a very serious loss of capital.

And No, Printing never works.

If you will, the whole flim-flammery of it all is the Reserve equivalent of hiding overdue notices in the kitchen drawer.

Edited by ParticleMan

Share this post


Link to post
Share on other sites

I know you're not being entirely serious but this touches on something I referenced earlier - rollover risk.

In the scenario where funds liquidate the short end and move to mid and long-dateds we will start to see rollover risk being an issue.

To put it another way, the funds the state has borrowed on the taxpayer's behalf are sufficiently large that successive parliaments will need to reborrow to service the shorter maturities (all of the bidding strength has thus far been at the short end - it has been far easier for market operations teams to finance the deficits at three month to two year maturities, because this is what these self same funds are buying).

If market rates at the short end rise, the repayment burden will actually increase - the state will be forced to refinance today's headache and offer far greater slices of its income (far greater proportions of the taxbase) to do so.

Some states have nothing left they can credibly offer - no more blood in the stone.

For investors already overweight in these issues, their risk-free holdings will essentially have no market value.

This is a whole new crisis - if a fund is attempting to match outflows of some say 25 year period (ie, an annuity product) against a currently overweight position in two year instruments (the assumption being that at maturity the funds will be rolled into a new, similarly short maturity)... if instead, prices collapse in the shorter maturities... the value of the fund (its claim on the economy) will vaporise far more quickly than any present estimate suggests possible (let alone probable).

It really doesn't take much of a fall in the price of a security yielding 0.15% (at the time of purchase), to result in a very serious loss of capital.

If you will, the whole flim-flammery of it all is the Reserve equivalent of hiding overdue notices in the kitchen drawer.

I do believe it was from you I first read the words....people will be looking for return OF capital, rather than a return.

course, the longer these monkeys continue to push the up boom conditions, the heavier the cart is going up the hill. Ponzi cannot continue ad infinitum. But making an appearance outside the office as creditors bay for money, Mr Ponzi can hand out a few bundles of cash to restore confidence one more time.

Share this post


Link to post
Share on other sites
Mr Ponzi can hand out a few bundles of cash to restore confidence one more time.

The cash this Mr Ponzi hands out result from his selling of coupons denominated in tomorrow's tax revenue to a group of funds I fear are going to pass right through "insolvent" without blinking until they hit "illiquid".

In all seriousness I strongly suspect that neither policy maker, regulator, nor institution understand this.

There seems to be zero consciousness out there that the vast explosion in public sector balance sheets has imploded the balance sheets of an unthinking pensions industry - and that having bought any realistic estimate of the entirety of global output once, that the pensions industry will be unable to do so again.

Share this post


Link to post
Share on other sites

As I've suggested in previous threads, QE1 has been largely financed by looting large, passive pools of capital - force-feeding low 

Shortly, these funds will face a stark choice.

They can liquidate the short end and buy mid-dateds instead inverting the yield curve in the process.

Or.

They can liquidate equities sending the ever-sacred indicies crashing.

Both scenarios will trigger additional government intervention (additional price controls).

The intervention will force the funds to accelerate their progress along whichever path they ultimately choose.

In short, these scenarios will play out much more quickly than any Reserve is currently forecasting - none of them (as far as I can see) show any sign of understanding their own causal role in all this.

And it will leave us all the poorer for it (any capital invested in "risk-free" instruments in this phase will be destroyed - and with it unavailable for risk-taking activity in the next phase, innovation hence productivity hence real growth flattens, worsening and lengthening the depression we now face).

The regulators, of course, are equally myopic - politicians world-wide appear convinced that given their previous round of price controls "worked" (it's getting easier to auction debt - even state debt!) - that all they need do is apply more of the same.

Volatility options of all types (commodities, stocks, foreign exchange, etc) all look vastly underpriced to me (I think Mr Taleb is going to have a very good year).

And trading strategies built with specific, historically modelled volatility bands in mind are extremely likely blow up - as liqudity continues  to leave the system apace.

The Red Text says buy Gold or anything physical.

The Green is also good sense, though I'd suggest buying VXX is a good approach.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 153 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.