Tagged: Treasury

Monoliths and Microseconds

“People are getting screwed because they can’t imagine a microsecond.”

Well, how about $1 trillion? Can we imagine that?

If you want context for the quote, read Michael Lewis’s book, Flash Boys (No. 1 now in NY Times nonfiction). Equally relevant and lost in the shadows of microseconds is the magnitude of the monolithic.

There’s a company you’d know that in the past 20 trading days has had intraday volatility of 108%. That is, summing daily spreads between high and low prices – somebody paid both – equals 8% more than a share costs. The entire value of the company in effect turned over the past month, plus an 8% commission. (Do you know your intraday volatility?)

Divided by 20, that 5.4% daily. Compare to overnight borrowing rates near 0.15% for banks, and 30-year mortgages at 4.4%. Yet beneath its skin, behavioral changes for this stock are miniscule. The average recent daily fluctuation in bottom-up investment – the money you talk to – is less than 2.3%.

There was one monolithic change. On March 24, demand from indexes/ETFs dropped 15%. Just once. Since that day, gradual price-erosion tallies eerily to a 15% decline. A one-day shift in asset-allocation cost 15% of market cap over the following month.

Yesterday we ran a dozen models for public companies reporting results today, weighing demographics and sentiment to project price-reactions. Outcomes are an amalgam of purposes. Without data, it’s impossible to know that price-moves reflect rational thought. If share of market did not change for investors, they didn’t set price, didn’t alter their views.

The Fed in 2013 bought $1 trillion worth of US Treasurys and mortgage-backed securities, pinning interest rates on ten-year US bonds near 1.7% until word leaked in May that it might stop. Between May-Dec 2013, Treasury yields rose 75% and average 30-year mortgage rates jumped 30%. (more…)

Infinite Money Theorem

“What do you see out there?”

Out here in Crested Butte, CO, where the overnight temperature was 35 degrees, we see vast beauty, perhaps unparalleled on the planet.

As for the other “out there,” it’s the No. 1 question we’ve gotten the past two weeks, even with clients reporting financial results. They’re most concerned with the macro view: What do we think will happen to the stock market if and when the Fed stops buying government-backed securities?

Some observers predict doom. If the Fed quits printing money, the helium goes out of the balloon and down it comes. Others see the opposite. Just yesterday Jim Paulsen at Wells Capital said the Fed’s exit means markets can normalize, shifting from arbitraging data to investing in economic growth. He says stocks will rise.

It’s important to understand what the Federal Reserve is doing. The Fed isn’t printing money per se. It’s in effect engaging in a massive derivatives swap – trading one thing for another, neither of which is a hard asset. The Fed buys about $85 billion of Treasury securities and government-backed mortgage derivatives every month. Since these instruments are backed by US taxpayers and derive from either future tax receipts or underlying mortgages, both are derivatives. (more…)