“Price insensitive buyer,” especially in the context of financial markets, looks anomalous. Such buyers would appear to be destined for ruin. However, the PIBs listed in this article are primarily government or government-regulated entities, which explains the irrationality. The wholly private entities listed in this article, corporations, risk parity funds, and some mutual funds, are subject to market discipline and it remains to be seen how many are in business after a full market cycle. The interesting question posed by this article: What happens when PIBs become PISs (price insensitive sellers)? From Tyler Durden, at zerohedge.com:
One narrative we’ve been building on for quite some time is the idea that both stocks and bonds have been propped up by a perpetual bid from price insensitive buyers. Put simply, it really doesn’t matter how overvalued something is if your primary concern is something other than maximizing your return on investment.
Take corporate buybacks for instance. Both equity-linked compensation and the market’s tendency to focus on quarterly results at the expense of the bigger picture have compelled corporate management teams to develop a dangerously myopic strategy that revolves around tapping corporate credit markets for cheap cash and plowing the proceeds into EPS-inflating buybacks. Whether or not this is the best use of cash is certainly debatable but when the goal is to manage earnings and appease stockholders, that doesn’t matter, and indeed, companies have an abysmal record when it comes to buying back shares at levels that later prove to be quite expensive.
In America, the price insensitive corporate management bid simply replaced the monthly flow the market lost when the Fed – the most price insensitive of all buyers – began to taper its asset purchases. Of course QE in all its various iterations playing out across the globe, is price insensitive buying taken to its logical extreme. With the ECB’s PSPP for instance, limits on the percentage of an individual issue that NCBs are allowed to own apply to nominal amounts meaning that, to the extent NCBs can buy bonds at a premium to par, they can effectively buy fewer bonds than they otherwise would have and still hit their purchase targets. In other words, if you overpay, it’s easier to stay under the issue cap when supply is scarce in eligible paper. So in some respects, the more EMU central banks pay for the bonds they purchase, the better.
In Japan, the BoJ has amassed an elephantine balance sheet full of ETFs and because one cannot classify stocks as “held to maturity”, Haruhiko Kuroda’s equity plunge protection is effectively a self-feeding loop – that is, the more stocks the central bank owns, the more it must buy in order to protect its balance sheet from the damage it would suffer were equities to sell off.
And then there are banks, mutual funds, and pension plans which for various reasons (regulatory and otherwise) are forced to accumulate assets at otherwise unattractive prices.
The question in all of this – and this may indeed become one of the most important considerations for market participants once every DM central bank bumps up against the Sweden problem – is this: what happens when the price insensitive buyers behind the inexorable rise in financial asset prices become price insensitive sellers?
To continue reading: If Price Insensitive Buyers Become Sellers
