Skip to main content

Clues

Yesterday the Fed surprised the market by announcing that it would leave its policy of printing $85B per month and purchasing with this newly-minted cash a mix of MBS and UST in the open market.  What made this announcement surprising was that most economists had already forecast that the Fed would taper their printing and purchases by at least $10B/month in order to begin to reduce the world’s dependency on the Fed, and in reflection of the much-pronounced economic recovery.

Based upon the Fed’s decision, it would appear that perhaps the recovery may not be as robust as many would like to believe.  There is no other explanation for this decision.  In the meantime, the distortion in the markets for asset prices continues and the day of reckoning gets pushed out further.  More investors, who may have been holding out some dry powder to invest when markets correct and asset values reflect fundamental value, will now be induced to throw in the towel and capitulate to the Fed’s seeming desire to have everyone all in.  I heard that one very well-known hedge fund, run by some of the smarter folks out there, is now 50% cash.  There are lots of clues out there.  Seems to me that many are choosing to ignore them and play the momentum trade.  So far, this has paid off well.  Someday it won’t.  

Popular posts from this blog

Greed & Laziness

In this most contentious and fascinating of election cycles, when nearly each conversation leads to politics, and when polarization runs so high, I ask myself - what is the essence of the debate between left and right?  What does it really mean to be a Conservative or a Liberal?

Why Rates Must Remain Low

There is an old bond trader joke that I first heard in the 1980’s when I traded mortgage-backed securities at Drexel Burnham Lambert.  It went like this:  “Upon dying, Albert Einstein finds himself in what he is told is heaven.  He encounters another individual there and asks him what his IQ is.  When he is told that it is 175 he is overjoyed, knowing that he’s found an intellectual peer with whom he can share much.  Upon meeting another, he discovers that person’s IQ is 140 and is pleased to have met another highly intelligent person with whom he can enjoy chess and other pursuits.  He is feeling pretty good about heaven, when he comes across a person who tells him that his IQ is a mere 90, and he is flummoxed.  What, he wonders, is this guy doing in my heaven and what can I even say to this person?  Then it comes to him.  ‘Where,’ he asks, ‘do you think interest rates are heading?’”

CMBS In Flux

The CMBS market has been in a period of upheaval, with dramatic spread widening on bonds and a resulting much more expensive cost of capital for real estate borrowers who depend upon this channel for their debt financing.Market participants today wonder whether we’ve entered a period like the summer of 2011, when spreads on bonds last widened this dramatically and then snapped back within a year to provide tremendous returns for those who were courageous enough to purchase bonds at the time when there was panic selling.Or, people wonder, is this recent downturn a prelude to a structural or systemic problem, like what was experienced in 2007, when spreads widened and sucked investors in, only to punish those early responders with a much more dramatic price collapse in the next 24 months.