(Bloomberg View) –
What time is Fed Day?
The essence of finance is time travel. Saving is about moving resources from the present into the future; financing is about moving resources from the future back into the present. Stock prices reflect cash flows into an infinite future; a long-term interest rate contains within it predictions about a whole series of future short-term interest rates.
Markets are constantly predicting future actions, and as those actions move closer in time, the predictions become more solid and precise. More than that, though: Because the markets don’t just predict the future, but guide decisions and allocate resources in the present based on those predictions, the prediction is often more important than the outcome, so that some radical philosophers believe that the event itself is no more real than the market that predicts it.
In a sense — in a real, economically meaningful sense — the Fed has already raised rates, because we have talked about it so much. In a sense, the Fed decision takes place within us, each day. In another, more accurate sense, though, “the Federal Open Market Committee releases its policy statement at 2 p.m. Wednesday,” in which it did announce that it is raising short-term interest rates above zero for the first time in seven years. Get excited.
Here is Bloomberg’s preview, which suggests that if nothing else, the era of easy money has led to a certain inflation in metaphors:
“Liftoff is essentially baked into the cake,” said Gennadiy Goldberg, U.S. strategist at TD Securities in New York. “But if the Fed capitulates on the four hikes, that would be seen as a dovish hike.”
At the Wall Street Journal, Jon Hilsenrath wrote an elegy for the end of an era. Matt O’Brien asks if that era might be coming back pretty soon. Money market funds are stoked. Online lenders are not. And what about your mortgage?
Worries about bond market liquidity are sort of fractal, repeating at different scales. There are micro-worries like how much it will cost to sell a bond, and medium-size worries like how much support dealers can provide to markets or how well equipped mutual funds are to handle redemptions. But it seems to me that the fully zoomed-out worry is: Can bond markets handle reversals? Has something changed in the structure of the market, or in the composition or behavior of investors, so that now if people want to sell bonds, there will be no one to buy them, and a crash will spiral into disaster?
That’s sort of an apocalyptic thing to think, but I suppose there was (and is?) a case that the withdrawal of bank market-making, or herding among investors, or the zero-interest-rate environment, or the rise of mutual funds offering daily liquidity to flighty retail investors, would not just increase volatility but fundamentally destroy the resiliency of bond markets.
But high yield did great yesterday! The big index ETFs, HYG and JNK, closed up about 1.6 and 1.2 percent, respectively, after a couple of terrible days. And “some big asset managers are looking at the recent corporate debt market turmoil as a buying opportunity”:
Bill Gross, a bond fund manager at Janus, has also been swooping in. High-yield is “just loaded with bargains”, Mr Gross said in an interview with CNBC on Monday. “It’s like the pelicans in Newport Beach. They’re just diving down and picking out those fish.”
I suppose Gross has no redemptions left to worry about, but in any case someone is buying, and life is going on for high yield. Others are more nervous:
“Recent weakness in higher-quality junk names in parallel with mutual fund outflows and illiquidity is also disconcerting, because this may be a preview to investors of how the credit cycle ultimately ends,” says Matthew Mish, a strategist with UBS.
And Wilbur Ross worries about “a wall of maturities starting in 2018, building up through 2021 [and] 2022.” But that’s fine, a diversity of views is fine. The worry would be if everyone was positioned the same way on the way up, and then repositioned the opposite way on the way down; that doesn’t quite seem to be happening.
Meanwhile, the past few days’ weakness in junk bonds “isn’t the making of another financial crisis,” in part because banks are mostly untouched by it. Part of why they’re untouched by it is that they’re very careful about repo financing, especially at year-end, which might be both exacerbating the recent crash but also making it less systemic. And in other news, “Third Avenue Bled Managers, Billions of Assets Before Fund Shut.”
I realize that my efficient-markets-fundamentalist leanings aren’t, like, right, as an absolute matter of fact. Surely investing skill exists, and there are patterns to markets, and you can make intelligent decisions about how to allocate your capital. But here is an article about how a lot of hedge funds have had rough years and are raising money anyway, and I submit to you that the most fun way to read it is while imagining that investing is a pure coin-flipping contest:
Mark W. Yusko, chief investment officer of Morgan Creek Capital, said the decision to give new money to a manager who has subpar performance in a given year ultimately comes down to a matter of faith.
“What you have to decide as an investor is, Do you believe that the skill level of the managers has changed?” Mr. Yusko said. “If you don’t, then the portfolio theory of investing says that’s when you should be adding capital.”