– The “Gates” Are Closing: SEC Votes Through Money Market Reform (ZeroHedge, July 23, 2014):
It was nearly five years ago when Zero Hedge first wrote: “This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied” in which we predicted as part of the ongoing herding of investors away from every other asset class and into stocks, regulation will be implemented to enforce that “money market fund managers will have the option to ‘suspend redemptions to allow for the orderly liquidation of fund assets” or in other words implement redemption “gates.” The logic: spook participants in the $2.6 trillion money market industry with the prospect of being gated (i.e., having no access to ones funds) and force them to reallocate funds elsewhere.
Moments ago the gates arrived, when following a close 3-2 vote (with republican commissioner Piwowar and democrat Stein dissenting), the SEC adopted new rules designed to curb the risk of investor runs on money market funds, capping the end of a years-long heated debate between regulators and the industry dating to the financial crisis according to Reuters.
Among the changes, funds will have to switch to a floating share price instead of the current $1/share (hence the term breaking the buck). But the key part: “The SEC’s rule will require prime money market funds to move from a stable $1 per share net asset value, to a floating NAV. It also will let fund boards lower redemption “gates” and fees in times of market stress.”
And therein lies the rub, because the very presence of the “gate” effect will be enough to send money market investors rushing out (as they are all sophisticated enough to know that this fake, rigged market is a house of cards just waiting to come down) and into other asset classes.
Of course, it is the desire of the SEC, the Fed and the US Treasury that the one asset class picked as an alternative to money markets is equities: considering that the entire rally since 2009 has been on the back of the Fed and the primary dealers, with virtually none retail participation, the SEC decided it was about time to herd the “retail investor” out of the ZIRP “danger” of money markets and into the “safety” of an all time higher stock market where even Janet Yellen admits there is at least a biotech and a social media stock bubble.
Below are some of the concerns voice by one of the objectors, Kara Stein, via Bloomberg which incidentally are all spot on:
Redemption gates are the “wrong tool to address risk,” said SEC Commissioner Kara Stein during open meeting.
Fear incentives will result in “greater chance of fire sales in times of stress and spread panic to other parts of the financial system while denying investors and issuers access to capital”
- “Money market funds are only one part of wholesale funding markets that need to be strengthened”
- In the event the gate imposed increases, investors have a “strong incentive to redeem ahead of others”
- While a gate may be good for one fund, “it can be very damaging to the financial system as a whole”
- When the gate for a fund is used, it doesn’t mean the “impact on wholesale funding markets will be prevented”
She is spot on. But forget about our opinion, or even that of the SEC, because while on the surface this now enacted proposal to establish withdrawal limits is spun as benign, it was the Fed itself who warned in April of 2014 that “the possibility of suspending convertibility, including the imposition of gates or fees for redemptions, can create runs that would not otherwise occur… Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs.”
Clearly, everyone understand that the only purpose behind implementing “gates” is to redirect the herd. And with some $2.6 trillion in assets, money markets can serve as a convenient source of “forced buying” now that QE is tapering if only for the time being. The only question is whether the herd will agree to this latest massive behavioral experiment by the Fed, and allocate their funds to a stock market which is now trading at a higher P/E multiple than during the last market peak.
And should this particular exercise in inflating stock bubbles fail, then gating bond funds, another “reform” which as we reported last month is in the works, should certainly force equities to unseen bubble proportions.
On the other hand, a blow off top in which the S&P rises by a few hundred points in weeks if not days may be just what this market needs for its final catharsis before everyone realizes just how insane centrally-planned things have gotten, and the long-delayed reset can finally take place.