"QE makes risk assets go up
In similar fashion to what we wrote about Japan in general and credit versus equities in particular in our April 2012 conversation "Deleveraging - Bad for equities but good for credit assets":
"Financial credit may be the next big opportunity
Although more probable than we previously thought, we still think it is less likely that the ECB would extend any purchases to regular non-financial bonds. It might suit a political purpose, but from an economic perspective we struggle to see much merit in lowering what are already record low funding levels for the large investment grade non-financials.
That said, even if the ECB chose not to buy them directly, by purchasing assets which fund managers hold interchangeably with non-financial bonds, the impact on non-financial spreads would be significant even at these tight levels." - source Citi
On a side note, those who listened to us have done well so far in 2014 given we hinted a "put-call parity" strategy early 2014, eg long Gold/long US Treasuries as we argued in our conversation "The Departed":
In fact, US thirty-year debt has gained 10.3 percent from Dec. 31 through yesterday, the most for the period based on Bank of America Merrill Lynch data that go back to 1988 as reported by Bloomberg by Wes Goodman in his article entitled "Treasury Long Bond's Record Year-to-Date Return Four Times S&P:
"A rally in 30-year Treasuries has pushed returns past 10 percent in 2014, the best start to a year in at least two and a half decades.
“It’s going to continue for some time,” said Yusuke Ito, a senior fund manager in Tokyo at Mizuho Asset Management Co., which has the equivalent of $39.1 billion in assets. “The pace of the recovery is not enough to generate inflationary pressure.”
Long bonds climbed 10.3 percent from Dec. 31 through yesterday, the most for the period based on Bank of America Merrill Lynch data that go back to 1988. The broad market rose 2.1 percent and the Standard & Poor’s 500 Index returned 2.3 percent. While bonds gained on the outlook for slow inflation, shorter notes lagged behind on speculation the Federal Reserve will raise interest rates in the years ahead." - source Bloomberg.
We have to confide we have also been playing this game via ETF ZROZ (we do indeed learn a lot from our central bankers and their magic tricks...).
On a final note, when it comes to the "Shrinking pie mentality", exporting deflation and China, given that in a Pareto efficient economic allocation, "no one can be made better off without at least one individual worse off", we have interestingly noted that China's services have recently replaced manufacturing and construction as per Bloomberg's recent Chart of the Day from the 22nd of April:
Services have replaced manufacturing and construction as the biggest part of China’s economy, a sign that the Communist Party’s goal of getting people to spend rather than just make cheap exports is working.
The CHART OF THE DAY tracks contributions from services, industry and agriculture to gross domestic product since 1992, with sectors such as real estate, retailing and finance overtaking manufacturing last year for the first time since at least 1978, with a 46 percent to 44 percent proportion. In 1996, the breakdown was 48 percent industry and 33 percent services. Agriculture’s contribution fell by half in the period to 10 percent, according to National Bureau of Statistics data compiled by Bloomberg.
“It’s an irreversible trend that the share of services in the Chinese economy will keep growing,” said Chen Xingdong, the Beijing-based chief China economist at BNP Paribas SA. “The days are gone when everything is manufactured in China,” partly because the younger generation is more demanding and better-
educated, he said.
The lower panel compares urban and rural populations, with cities taking the biggest share starting in 2011, the data show. As recently as 1998, the rural population was twice as big as its urban counterpart, the data show. Of China’s 1.36 billion residents as of 2013, 54 percent lived in cities.
The shift toward services marks a milestone for the government and Premier Li Keqiang, who has made a priority of moving people from farms to cities to spur domestic demand as people accumulate more wealth and spend their money on homes, electronics and entertainment. There is room for more growth: China’s urbanization rate compares to 80 percent in developed nations like the U.S.
“In the past, a Chinese worker basically ate and prepared for work, but now they are pursuing a better lifestyle,” said Chen, who previously worked at the World Bank. Shifts in habits and demographics will put pressure on traditional industries like cement and steel and bring new opportunities to consumer, health-care and education businesses, he said." - source Bloomberg