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In brief, if anything, the Fed would prefer that all retail investors pull their money out of bonds funds (and money markets of course), and invest them into 100x+ P/E biotech stocks. Because after all, today's stock market is nothing but the biggest Fed-propped Ponzi scheme in existence.
And in order to achieve that, according to the FT, "Federal Reserve officials have discussed imposing exit fees on bond funds to avert a potential run by investors, underlining regulators’ concern about the vulnerability of the $10tn corporate bond market."
FT justifies this latest unprecedented pseudo-capital control by sayng that "officials are concerned that bond-fund investors, as with bank depositors, can withdraw their money on demand even though the assets held by their funds are long-term debt and can be hard to sell in a crisis. The Fed discussions have taken place at a senior level but have not yet developed into formal policy, according to people familiar with the matter."
“So much activity in open-end corporate bond and loan funds is a little bit bank like,” Jeremy Stein, a Fed governor from 2012-2014 told the Financial Times last month, just before he stepped down. “It may be the essence of shadow banking is ... giving people a liquid claim on illiquid assets.”
The Fed's justification for this latest bazooka approach in forced capital reallocation:
Exit fees would seek to discourage retail investors from withdrawing funds, thereby making their claims less liquid and making a fire sale of the assets more unlikely.
"Oddly" there is nothing in the Fed's proposal about gating the most overvalued asset classes of all, equities, or say, biotechs and momo stocks, where the drawdowns, when they happen, are so fast and vicious, the bulk of hedge funds are still down for the year precisely because they were all led like obedient sheep into the Div/0 PE slaughter. Also, memory is a little fuzzy, but in the days after Lehman, it was equity hedge funds that promptly gated all their investors.... not bond hedge funds, which in fact were scrambling to deal with the influx of new funds.
Also, it goes without saying that "discouraging investors" from withdrawing funds is the last thing on the Fed's mind, which knows very well that when it comes to investor behavior all that matters is how the Fed's future intentions are discounted.
And with this unprecedented step, the Fed is sending a very clear message: it may be next year, or next month, or next week, but quite soon you, dear retail bond-fund investor, will be gated and will be unable to pull your money.
The only thing that was missing from the FT piece was a casual reference to Cyprus.
So what is the obvious desired outcome, at least by the Fed? Why a wholesale panic withdrawal from bond funds now, while the gates are still open, and since those trillions in bond funds have to be allocated somewhere, where will they go but... stock funds.
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