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Who Needs Graham & Dodd When We Have ‘Quantitative’ & ‘Easing’?

Courtesy of ZeroHedge View original post here.

Authored by Richard Breslow via Bloomberg,

Today has that feel about it where the first thing you are inclined to do is hit a bid. Doesn’t matter in what. Nothing looks palatable. What to sell is hard to gauge, however, because you have to get something in return. Is it any wonder that there is so much effort and academic research going into making cash an uneconomic alternative to chasing asset prices higher? Even those with questionable value beyond what we expect them to do next. We’re all traders now. And that means selling is also part of the repertoire. The message remains: close your eyes and go with the flow. Unless you see others continuing to fill in your bids. Traders are the ultimate social animals.

Source: Bloomberg

We’ve become habituated to assume that whenever being long doesn’t work with immediate advantage, it’s time to cry foul and expect some official intervention. We used to, quaintly, call it the central-bank reaction function. And they have been party to this for years. Now we need fiscal and macro-prudential policies to pick up the slack and have yet to accept the reality that the jury is out on whether there is any chance of that keeping all of the balls in the air. Or, worse, it will be a no-show pipe dream.

This all seems to be a remarkably pessimistic Monday morning outlook given that equity markets are clinging to near all-time highs. But, like bond yields and credit spreads, value is a reflection of where asset prices are with little basis in historical norms. No need for Graham and Dodd when you have quantitative and easing. It’s ironic, maybe bitterly so, that this negative emotion is so overwhelming while at the same time the biggest economic bears are touting what they describe as the early signs of a global economic recovery.

Source: Bloomberg

If we got here courtesy of free, not even cheap, money when the global economy was in the midst of a continued struggle, why should we necessarily continue on should things actually normalize? But that is what we are being told. Although, somebody needs to tell emerging market traders.

It isn’t terribly surprising that virtually everyone has a level where we are meant to start scaling into additional bond longs. Things are looking up. Be happy. Now prepare to fade the notion. I don’t know anyone, even the most ardent economic bulls, who think yields are headed back to levels we would have previously taken as shockingly low. But they conceivably could be. Cash isn’t worthless, yet.

More likely, and first, investors might start to differentiate based on perceived quality and credit-worthiness. Every global asset might not continue to be taken as equally risk free. If you are looking for a bond-yield canary in the coalmine, Treasuries might give a clue, but it will be other markets’ spreads to them that will tell the tale. Maybe it will just have to be the price paid to get between here and the noble goal of a banking union in Europe. Or it could just be simple survival instinct that goes along with P&L management. Controlling yields could well be an exercise undertaken in untested waters with unintended consequences in a world of unfathomably large positions where every investor has the same position. There is no such thing as automatic pilot.

The search for yield has been the main activity for investors for years. They were just dutifully doing what they were told and rewarded for it. It has driven everything else. One has to wonder if we could be entering a period where it isn’t enough and capital preservation becomes paramount. Does it necessarily follow that if some of the problems that have beset the global economy lessen, or are assumed away, that the same assets that have been in so much favor will continue to exert their irresistible allure? That’s up to central banks. And whether they are willing and able to maintain their activism indefinitely.

It’s tempting to think the Fed is on perma-hold and this week’s long list of speakers won’t break new ground. Even with two day’s of Congressional testimony by Chairman Jerome Powell. With all-important Treasury yields in play, I’d continue to listen carefully. The year isn’t over yet.

Source: Bloomberg


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