PERVERSITY LOOMS LARGE

 
Words are important.

We are all told, as author George Eliot noted, to watch our words, to others and ourselves. The latest word of importance, given the current market, is patience, a trait humans are not well-known for having much of.

In this case, it's the ill-conceived Fed's word to describe their recent monetary policy posture from these bureaucrats who huddle periodically in the bowels the Eccles Building in Washington. Not all perversity comes from witches' dens.

The term will be much on investor minds this coming week as the Fed goes into its silent mode. But back to perversity, the central bank kind.

To prove the point, here's a couple of quotes from a recent piece by John Dizzard in the Financial Times about the downside of QE from his "Investors should embrace the inherent contradictions of quantitative easing."

The advent of negative yields for the best European government or corporate (bond) issuers is usually reported in the media as some sort of curiosity, like a bright object in the night sky that seems to be getting bigger. What it really represents is the breakdown of the policy's world response to the global financial crisis. A large European bank's credit strategist told me: 'We have searched through the records and asked the ECB how they think their (asset purchase strategy) will work, and there is no evidence they know the answer.

From a cycle perspective, the time for the ECB to carry out QE was back when asset prices were too distorted and low. But credit spreads are already low. They are chasing investors into markets that will create a problem when markets normalize. It's just perverse.

What this is about in case you don't get it is QE's contribution to the paucity of high quality assets. In case you have not been paying attention, there's a real shortage of high quality assets around today. In brief, it's impossible for fiduciaries now to cover the future needs of their beneficiaries by any stretch of the prudent man rule.

The fiduciaries' hunger for yield on respectable assets has also run into the requirements for banks and other market participants to put up more high quality collateral for derivatives transactions, Dizzard writes. This last one is thanks to those astute, ever-present, well-intentioned regulators.

Translation: There are many unintended, perverse consequences buried in here that nobody fully understands and won't until they rear their ugly consequences.