Hate Tina? The smartest people in the room do, too

A buddy of mine runs bond funds for a huge multinational financial firm.  He hates Tina.

Tina is an acronym for “there is no alternative”.

Bond fund managers lament having no good choices to invest billions of dollars.  Bond yields are notoriously low and they have been for eight years.  Central banks across the globe have kept short term rates at or near zero that long.  Sure, the Fed raised the fed funds rate 0.25% in December and the market threw up all over it.  The Fed wants to raise it another 0.25% but is concerned that the market may tank if they do.  All central banks are confronted with the same problem: no real economic growth, stagnant wages, rampant underemployment, anemic business investment.

FRED

What is crazy is that central bankers, always the smartest people in the room, worldwide have been prancing around while the emperor who has no clothes leads the parade.  The really crazy thing is that the smartest people on the planet, global central bankers, have no clue how to fix it.  They just met for three days in Jackson Hole, Wyoming, and this is the best they could come up with:

Their message to global governments: “HELP!”[i]

Central bankers hate Tina, too.

It appears their solution may be for central banks to buy corporate debt[ii], in effect supplying capital directly corporations which is equivalent to nationalizing corporate debt.  You heard that right, taxpayers will be taking on the risk of large (and maybe small) corporations if central banks buy corporate bonds.  It’s another form of bailout.

The low rate environment is forcing big banks to double down on financial risk on scale never before seen.  Want evidence?  Look at the ProShares Ultra Short QQQ (SQQQ) whose objective is to generate three times the negative performance of the S&P 500 (ProShares symbol QQQ) every day.  The top five positions (counter party positions, technically) are held by commercial banks.  Banks are putting their capital to work on the financial markets instead of lending it to small and medium-sized businesses because their models show less risk and higher return with higher certainty than making loans.

Top Holdings

Institutional investors the world over are doing the same.  Hundreds of trillions of dollars have been allocated to “investments” that do not produce anything: no real products or services, no jobs, and in many cases, no taxes.  All financial engineering.

George Soros has made the same bet in a very big way[iii].  He has shorted 4 million shares of SPY, the SPDR S&P 500 ETF by buying puts which gives him the right to put the stock back to the counterparty if the price falls below the strike price.  This is essentially the strategy the John Paulson employed to pull of the Big Short.  But it wasn’t a quick trip for Paulson and it may not be a quick one for Soros either.  Paulson had to borrow over $200 million to keep his bets in play, to avoid margin calls in effect.

In an earlier blog I promised to give you a glimpse of where to park funds in order to prosper in the next recession.  But beware, this could be a case of being right but still being wrong because if the markets tank, as markets do, and if the world’s top commercial banks are wiped out, it may be a very long time before one could be able to access funds tied up in them and in the meantime, legislators may invent a way to nationalize your funds as well.  And keep in mind that even Paulson was never completely certain where the bottom was or whether he would be able to collect on all of his correct bets.

The advantage of SQQQ over shorting stocks is that when you short a stock, you can only profit between your acquisition price and zero.  SQQQ is designed to triple that return.  And the advantage of SQQQ over buying puts as Soros is doing is that puts expire after a period of time, taking the premium you paid to buy them with them, meaning you have to be prepared to re-buy several times if you are too early.

Tina is making people do crazy things.

 

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[i]  Global central bankers, stuck at zero, unite in plea for help from governments https://ca.news.yahoo.com/global-central-bankers-stuck-zero-unite-plea-help-123135496–business.html

[ii]    https://ca.news.yahoo.com/fed-nears-rate-hikes-policymakers-plan-brave-world-005117150–business.html

[iii]  Believe in George Soros? Short S&P 500 with These ETFs  www.nasdaq.com/article/believe-in-george-soros-short-sp-500-with-these-etfs-cm666674#ixzz4IjRqKmFA 

http://www.nasdaq.com/article/believe-in-george-soros-short-sp-500-with-these-etfs-cm666674