08Dec10:41 amEST

Unintended Consequences for Yield Hunters

The interesting part about economics is that you always must ask the question, "And then what happen next?" to paraphrase Warren Buffett. 

Applied to the market landscape we face presently, the reality is that many, many years of ZIRP and QE has seen, in effect, misallocations of capital which have ended poorly, even as the major indices have thus far avoided an outright bear market. 

Specifically, fracking plays came and went, as did many growth favorites in 2014 like FEYE SPLK. Those stocks and sectors features exuberant, one-way steep uptrends followed by abrupt crashes in a matter of weeks and months. 

Currently, the MLPs (Master Limited Partnership) are the misallocation of capital du jour, as names like KMI yield 13% while the stock plunges on a daily basis. To be sure, most MLPs are now wildly oversold and can easily rally back to the tune of 20-30% in a matter of days. 

But I suspect we will not arrive at a meaningful low until we see, perhaps, a few bankruptcies of note in the entire energy complex. I am not implying that Exxon is in danger. But firms like CHK have been on the bubble for a while now, and the high yield/junk bond markets are still painting a gloomy picture. 

So against a backdrop of ZIRP and (previously) QE, as widely-praised as they have been, the unintended consequences of chasing yield look to be coming home to roost as investors essentially ignored the balance sheets for many of these seemingly high grade MLPs.

Much like Max Cady in Cape Fear (1991), the market is making sure investors learn about their loss of discipline, all part and parcel of the unintended consequences promoted by historically easy monetary policy. 

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