The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

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The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by Ad Orientem » Sun Apr 12, 2020 8:27 pm

On Thursday, knowing that a three-day Easter weekend was coming and the attention of the public would be elsewhere, the Federal Reserve announced that it would allow two of its emergency lending programs to begin buying junk bonds. Those are bonds with less than an investment-grade credit rating, meaning they have a greater likelihood of defaulting. The Fed is not simply accepting junk bonds as collateral for loans, it will actually be buying junk bonds — potentially hundreds of billions of dollars of them.

Two of the popular junk bond ETFs, iShares iBoxx High Yield Corporate Bond ETF (symbol HYG) and SPDR Bloomberg Barclays High Yield Bond ETF (symbol JNK) closed the trading day on Thursday up 6.55 and 6.71 percent, respectively, on the announcement. Those ETFs had been plunging in price for most of the month of March.

For years now, prudent investors have been forgoing risky investments like junk bond ETFs and accepting a much tinier yield on U.S. Treasury securities. Now, high rollers like hedge funds that bought junk bonds and junk bond ETFs and received the higher yields, are getting bailed out of these risky bets. The markets will now, going forward, price junk bonds on a closer plane with Treasury securities, assuming the Fed will not let them fail.

This is effectively killing the pricing mechanism of Wall Street. A U.S. Treasury note has the unconditional guarantee of the U.S. government to make the timely payment of interest every six months and pay the principal at maturity. Junk bonds are backed by nothing more than deeply-indebted corporations, which can, and do, frequently file for bankruptcy protection, making their bonds sometimes sell for pennies on the dollar. Going forward, junk bond ETFs will be priced on the premise that the Fed may ride to the rescue.

Read the rest here...
https://wallstreetonparade.com/2020/04/ ... llocation/
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by Kriegsspiel » Mon Apr 13, 2020 7:17 am

So, wow just wow I can't even.

Dovetails nicely with this article from Zerohedge, "Let Them Fail" - Billionaire Explains To Gobsmacked CNBC Host How Capitalism Is Supposed To Work. This kind of corporatism is hideous on the face of it.
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by CT-Scott » Mon Apr 13, 2020 7:53 am

Ad Orientem wrote:
Sun Apr 12, 2020 8:27 pm
Read the rest here...
https://wallstreetonparade.com/2020/04/ ... llocation/
Thanks, that was a great read! In fact, I found myself going down a rabbit hole and reading other articles of theirs that were embedded links in each of their articles. I'll definitely be adding that site to the list of sites I check regularly.

So, if one believes everything they're saying, what would be some ways to protect/grow your money over the next couple of years, and what are some things you should avoid? Even if the underlying issues/solutions that the government/Fed is doing is very similar to what they did in 2008, the COVID-19 lockdown is a very different factor, so I'm not sure if looking at what performed well/worse in 2008-2012 (or whatever timeframe) would necessarily work exactly the same way in the current situation.
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by CT-Scott » Mon Apr 13, 2020 8:06 am

Kriegsspiel wrote:
Mon Apr 13, 2020 7:17 am
Dovetails nicely with this article from Zerohedge, "Let Them Fail" - Billionaire Explains To Gobsmacked CNBC Host How Capitalism Is Supposed To Work. This kind of corporatism is hideous on the face of it.
Thanks, that's a good read, too! So according to the closing quote in that article, "commodities and collectibles" are where one investor wants to put his money.

From that article, there's one quote I'd like to highlight:
Which brings us to our next point. After Palihapitiya explained the bankruptcy process, Wapner responded with a question that's probably asked on his channel at least half a dozen times a day: "What about the 401(k)s?"

"But you don't think the employees of these companies own stocks, own the company's stocks?"

To which Palihapitiya had another point ready.

"These things are owned by these huge amorphous organizations...ultimately downstream the employees own a few hundred dollars or a few thousand dollars of shares."

That's right: After the world saw what happened to Enron employees who invested their entire retirement savings in Enron stock, there probably isn't a single American who keeps literally all of their money in the shares of their employer. Even employee pension plans are typically managed by third parties and don't consist of a larger percentage of the company's stock.
I will say that it continues to amaze me how many family members and friends continue to own their employer's stock inside of their 401k accounts (or have RSUs that vest and they choose to keep the stock invested in their company). I can imagine scenarios where I was particularly confident/bullish about the company I worked for, where I might "gamble" that way, but I live by the rule of asking/answering the question: If I had $1000 burning a hole in my pocket, would I buy my employer's stock with it? Usually, the answer is 'no.'
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by doodle » Mon Apr 13, 2020 8:19 am

The moral hazard that this creates will have long term implications for our economy. I'm tired of participating in a system where the rulebook is constantly changing in order to benefit a small fraction of the participants. The lesson if I were a big corporation employing many people would be that the more recklessly I behave with all my other corporate colleagues and risk I take the more likely I am to be bailed out. Prudence puts businesses at a competitive disadvantage.
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by Kriegsspiel » Mon Apr 13, 2020 8:42 am

doodle wrote:
Mon Apr 13, 2020 8:19 am
The moral hazard that this creates will have long term implications for our economy.
Yes. Even a country that did corporatism well, Japan, it didn't turn out great. I think it would be worse in America, because we don't have Japanese culture.
I'm tired of participating in a system where the rulebook is constantly changing in order to benefit a small fraction of the participants. The lesson if I were a big corporation employing many people would be that the more recklessly I behave with all my other corporate colleagues and risk I take the more likely I am to be bailed out. Prudence puts businesses at a competitive disadvantage.
If you are truly tired of participating, I see a few options. You can go more HAM than the tech portfolio; 100% gold. Or some combination of Alpha Strategy (stockpiling real goods) and gold. Hell, real estate may be a good idea.
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by doodle » Mon Apr 13, 2020 9:00 am

Kriegsspiel wrote:
Mon Apr 13, 2020 8:42 am
doodle wrote:
Mon Apr 13, 2020 8:19 am
The moral hazard that this creates will have long term implications for our economy.
Yes. Even a country that did corporatism well, Japan, it didn't turn out great. I think it would be worse in America, because we don't have Japanese culture.
I'm tired of participating in a system where the rulebook is constantly changing in order to benefit a small fraction of the participants. The lesson if I were a big corporation employing many people would be that the more recklessly I behave with all my other corporate colleagues and risk I take the more likely I am to be bailed out. Prudence puts businesses at a competitive disadvantage.
If you are truly tired of participating, I see a few options. You can go more HAM than the tech portfolio; 100% gold. Or some combination of Alpha Strategy (stockpiling real goods) and gold. Hell, real estate may be a good idea.
Currently traveling across country (picked an awful time to begin my trip) looking for somewhere to drop out long term. On West coast currently but thinking of looking around back towards Midwest as prices out here have gotten ahead of where I want to be....although there are still pockets of affordability out here for plots of productive land near decent sized city.
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by vnatale » Mon Apr 13, 2020 10:52 am

CT-Scott wrote:
Mon Apr 13, 2020 8:06 am
Kriegsspiel wrote:
Mon Apr 13, 2020 7:17 am
Dovetails nicely with this article from Zerohedge, "Let Them Fail" - Billionaire Explains To Gobsmacked CNBC Host How Capitalism Is Supposed To Work. This kind of corporatism is hideous on the face of it.
Thanks, that's a good read, too! So according to the closing quote in that article, "commodities and collectibles" are where one investor wants to put his money.

From that article, there's one quote I'd like to highlight:
Which brings us to our next point. After Palihapitiya explained the bankruptcy process, Wapner responded with a question that's probably asked on his channel at least half a dozen times a day: "What about the 401(k)s?"

"But you don't think the employees of these companies own stocks, own the company's stocks?"

To which Palihapitiya had another point ready.

"These things are owned by these huge amorphous organizations...ultimately downstream the employees own a few hundred dollars or a few thousand dollars of shares."

That's right: After the world saw what happened to Enron employees who invested their entire retirement savings in Enron stock, there probably isn't a single American who keeps literally all of their money in the shares of their employer. Even employee pension plans are typically managed by third parties and don't consist of a larger percentage of the company's stock.
I will say that it continues to amaze me how many family members and friends continue to own their employer's stock inside of their 401k accounts (or have RSUs that vest and they choose to keep the stock invested in their company). I can imagine scenarios where I was particularly confident/bullish about the company I worked for, where I might "gamble" that way, but I live by the rule of asking/answering the question: If I had $1000 burning a hole in my pocket, would I buy my employer's stock with it? Usually, the answer is 'no.'
Are you telling me that the enormous amounts I invested in baseball cards and other sports cards from 1988 to 1990 which then got but in half in the 1990 recession may not FINALLY be worth something??!!

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by Kriegsspiel » Mon Apr 13, 2020 5:30 pm

Libertarian666 wrote:
Mon Apr 13, 2020 4:01 pm
Kriegsspiel wrote:
Mon Apr 13, 2020 8:42 am
doodle wrote:
Mon Apr 13, 2020 8:19 am
I'm tired of participating in a system where the rulebook is constantly changing in order to benefit a small fraction of the participants. The lesson if I were a big corporation employing many people would be that the more recklessly I behave with all my other corporate colleagues and risk I take the more likely I am to be bailed out. Prudence puts businesses at a competitive disadvantage.
If you are truly tired of participating, I see a few options. You can go more HAM than the tech portfolio; 100% gold. Or some combination of Alpha Strategy (stockpiling real goods) and gold. Hell, real estate may be a good idea.
Real estate is likely to be a big loser due attempts by the government to suppress the hideous inflation that is going to wash over the country as soon as all that freshly printed money actually lands in people's bank accounts.

I don't think Trump is nearly as dangerous in that respect as any Democrat but real estate is illiquid even in good times so once you see the danger it's too late to get out.
Rental real estate. Of course, the rulebook does change sometimes, but generally in favor of renters: rent control, fair housing laws, eviction laws, etc. But rental real estate has been a good play for centuries. And to doodle's point, it can exist outside the "system" of corporations and finance. It's very "HIFFIAUW" in that it's common practice to rely completely on contractors and forego employees.
You there, Ephialtes. May you live forever.
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by Kriegsspiel » Thu Apr 16, 2020 8:50 am

Cullen's take:
I am being a little unfair with my “Fed Derangement” talk. It’s not all good. For instance, the Fed is buying high yield bond ETFs. Why in the world would they do that? This doesn’t finance the firms directly. It just tries to boost asset prices. In the long run the underlying firms (and the market price) will only remain high if the firms succeed. Buying the secondary market debt is putting the cart before the horse. It’s like thinking that by buying a bet on a horse you will change the way the horse runs. That’s silly. They should stop this now.

There’s also reports that asset managers are getting loans via these programs. Why did they allow this? Asset managers (like myself) are perfectly capable of working from anywhere. And if they’re losing money due to market losses then that’s on them. Market declines are part of the business. We can’t be bailed out every time there’s a decline. Further, many of us have been running extremely prudent strategies for years. My countercyclical strategies have been underweight stocks for years and overweight short-term bonds and money market funds. I am not going to ask for a dime from the government because my firm was very responsibly positioned coming into the crisis and I don’t need help. Why should an irresponsible firm get a handout?

Look, I am perfectly fine with most of the bailout money that’s going to the real economy. If you work at Walmart and you’re being hurt by this then I hope you get enough money to make it through this and support your family. You didn’t do anything to cause your current situation. You didn’t cause the virus. And then the government probably told you you couldn’t go to work. Yes, you deserve some aid to hold you over. But asset managers who were flying high last year sowed the seeds of their current downturn. I’m not sure how we’re justifying bailouts to them. link
I recently learned there was a different version of the ant and the grasshopper from the one I knew. The one I learned when I was a kid (from an old book of fables and parables) was that the grasshopper dies in the end. Apparently the New Age one has that ant feeling sorry for the grasshopper and helping him out. Très Boomerlennial.
You there, Ephialtes. May you live forever.
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by Kriegsspiel » Thu Apr 16, 2020 8:58 am

Another one in the same vein, from Strong Towns:
Remember, if the rent drops, the value of the property drops [and then the developer can't maintain maximum leverage without incurring some costs. -K]. Even with a long feedback loop, that’s the constraint that can’t be avoided. Lower rents destroys the commercial real estate market along with your pension fund (as I wrote a year ago) and a whole bunch of other supposedly safe investments that were chasing higher returns. This is going to be painful, and I suspect we’ll do everything we can to blow more bubbles and try to avoid this pain.

Yet, our small businesses need lower rents. Our commercial property owners need more flexibility in how they respond to local needs. This adjustment is acutely painful, no doubt, but let’s understand that it is fixing a chronic problem that has also grown deeply painful for a broad spectrum of society. . . We can spend billions bailing out commercial real estate investments that have lost all touch with reality, or we can spend a small fraction of that keeping our local businesses on life support, allowing them to emerge after this financial disaster (of our own making) in position to thrive in a marketplace cleared of the unfair subsidies and advantages long given their corporate competition. link
You there, Ephialtes. May you live forever.
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by shekels » Thu Apr 16, 2020 9:07 am

Kriegsspiel wrote:
Thu Apr 16, 2020 8:50 am
Cullen's take:
I am being a little unfair with my “Fed Derangement” talk. It’s not all good. For instance, the Fed is buying high yield bond ETFs. Why in the world would they do that? This doesn’t finance the firms directly. It just tries to boost asset prices. In the long run the underlying firms (and the market price) will only remain high if the firms succeed. Buying the secondary market debt is putting the cart before the horse. It’s like thinking that by buying a bet on a horse you will change the way the horse runs. That’s silly. They should stop this now.

There’s also reports that asset managers are getting loans via these programs. Why did they allow this? Asset managers (like myself) are perfectly capable of working from anywhere. And if they’re losing money due to market losses then that’s on them. Market declines are part of the business. We can’t be bailed out every time there’s a decline. Further, many of us have been running extremely prudent strategies for years. My countercyclical strategies have been underweight stocks for years and overweight short-term bonds and money market funds. I am not going to ask for a dime from the government because my firm was very responsibly positioned coming into the crisis and I don’t need help. Why should an irresponsible firm get a handout?

Look, I am perfectly fine with most of the bailout money that’s going to the real economy. If you work at Walmart and you’re being hurt by this then I hope you get enough money to make it through this and support your family. You didn’t do anything to cause your current situation. You didn’t cause the virus. And then the government probably told you you couldn’t go to work. Yes, you deserve some aid to hold you over. But asset managers who were flying high last year sowed the seeds of their current downturn. I’m not sure how we’re justifying bailouts to them. link
I recently learned there was a different version of the ant and the grasshopper from the one I knew. The one I learned when I was a kid (from an old book of fables and parables) was that the grasshopper dies in the end. Apparently the New Age one has that ant feeling sorry for the grasshopper and helping him out. Très Boomerlennial.
Fatten em up before the slaughter?
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Re: The Fed Is Killing the Two Main Functions of Wall Street: Price Discovery and Prudent Capital Allocation

Post by Kriegsspiel » Wed May 27, 2020 7:43 pm

Related, and funny:
He messaged me asking me if I knew anything about Doordash, and oh boy, did I get Softbank-triggered. I had just read about their $400 million Series F and it was among the WeWorkian class of companies that, for me, represented everything wrong about startup evolution through the 2010s. Raise a ton of money, lose a ton of money, and just obliterate the basic economics of an industry.

Doordash was causing him real problems. The most common was, Doordash delivery drivers didn't have the proper bags for pizza so it inevitably would arrive cold. It led to his employees wasting time responding to complaints and even some bad Yelp reviews.

But he brought up another problem - the prices were off. He was frustrated that customers were seeing incorrectly low prices. A pizza that he charged $24 for was listed as $16 by Doordash.
. . .
That’s the thing about how industries have evolved over the past decade. I know I ascribe ZIRP as the cause of all ills in the world, but this sometimes feels like the greatest ZIRP story ever told.
link
You there, Ephialtes. May you live forever.
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