Chris Martenson Answers How Long The Party In Stocks Can Last

Tyler Durden's picture

Submitted by Chris Martenson

How long can the party in stocks last?

The headlines are screaming at the top of every financial media outlet tonight:  The Dow Closes Above 12,000 For the First Time in Two Years!

What's going on here?  Is the recovery well and truly underway?   And, if it is, why is the Fed dropping hints again that "QE3 may get discussed" at future Fed meetings, as Kansas City Fed President Thomas Hoenig said on Feb 1st?

Given the raft of good economic news lately, one might be forgiven for wondering what the Fed has in mind here.  If everything is so economically rosy, why are they already dropping trial balloons about more Quantitative Easing?  What are they seeing that we are not seeing, that justifies more than $100 billion in thin air money each month, and why won't they just tell us what it is? 

Here's how member dbworld put it earlier today:

I thought I heard CNBC state the other day that there was seen an inflow into the US Equities market which hasn't been seen in a while. I didn't catch the details, but I'm hoping that Chris has a read on this and an explanation on why the US stock market is so strong.

While it's true that retail investors have only very recently begun moving more money into stock funds than they have been removing, reversing a 33-month-long outflow, this is focusing on the wrong element in the equation.  Retail investors provide only a minor amount of the rocket fuel used to elevate the stock market over the past several months.

Look at the amounts here, and also pay attention to the timeframe:


Over a 36 week period spanning from May 2010 to the end of January 2011, there was only one instance of 'investors' putting more money into stock mutual funds than they withdrew, and that one ,outlier was well under a billion dollars.  Over that 36 week period, over $100 billion was removed from the markets by investors.  Even when money started moving back in over the past two weeks, I want you to note the scale; the combined total is $6.7 billion.  Keep that figure in mind.

Instead, we should first focus on the massive injections of raw, potent, thin-air money (a.k.a. "credit easing") by the Fed into the financial system.  Sometimes this is referred to as "liquidity," which it is.  But that's too narrow a definition, because it is much more; it also happens to be high-powered base money (a.k.a. 'Wall Street rocket fuel').

Here's the stock market story over the past eight months:


Note that QE II began in early November of 2010 and that the stock market is up 20% since the end of August.

As an aside, I used to track the Fed's thin-air money programs very closely, and if you had told me as recently as three years ago that the Fed would have been running 11-figure POMO operations each and every month, I would have told you it was unthinkably impossible.  But here we are, that is exactly what is happening, and I am largely numb to the process, which worries me somewhat, as it means that my baseline has shifted.

At any rate, the point here is that from those August lows to now, retail investors have taken out far more money from the stock market than they've placed back in; a total of around minus $38 billion.

But over that same period, the Fed has placed nearly an entire order-of-magnitude more thin-air money, some $350 billion dollars, into the hands of financial institutions, some of whom consider the stock market their personal playground.

Here's a chart of the cumulative POMOs by the Fed from the end of August 2010 to now:


Should we consider the injection of more than a third of a trillion dollars and a stock market that is up by 20% to be a coincidence?  No, not in the least.  The stock market has become, if anything, a liquidity gauge first and a discounting machine second.  The fundamental that matters most is how much money is flowing into the machine.

So it is my view that the trillions of dollars of thin-air money and deficit spending are finally finding their mark (asset prices) and doing their work, just as I predicted they would.  Where some called for deflation to be the irresistible force that would drag us all down, I've consistently leaned towards the side of inflation.  Although, to be fair, I have always hedged that view somewhat, with a 70/30 split held for nearly 5 years that was recently amended to 80/20 (in 2010 shortly after QE II was announced).

On a Tear

Unfortunately for the rest of the world it's not simply the stock market that is the lucky beneficiary of all this Fed largess.  Thin-air money, once released into the wild, tends to have a mind of its own.

Commodities are now setting new records almost daily.  Where the stock markets still have some catching up to do, commodities are exploring virgin territory.


This is serious business, folks.  The future is not going to arrive 'someday.'  For the billions of people who spend a huge portion of their income on food and fuel, it has already arrived.

Looking at the above chart of the past 12 months, what we see is that everything, from metals to stocks to bonds to grains to energy, has experienced profound price increases. That pretty much covers everything you need to live on and the bulk of the paper universe.  Such a chart is a historical rarity for any one country, yet it currently happens to apply to the entire world.  You are living in historic times, which certainly belabors the obvious.

Your Lying Eyes

On the flip side, the story we are being told almost daily is that inflation is very low -- too low, even -- in a worrisome sort of way.  I am reminded here of an old Richard Prior skit where his wife walks in on him in bed with another woman.  To her increasing agitation, he denies that he has been cheating on her, finally shouting, "Who are you going to believe, woman?  Me, or your lying eyes!?"

Well, my lying eyes see something very different in that chart above from what I am being told; instead of worryingly low inflation, I see rapidly rising inflation that is very close to slipping out of control.   

I spend as much time on this subject as I do because the decisions you make based on whether you are protecting yourself from inflation vs. deflation are as different as to whether you grab an anvil or a life raft on your way out the door when facing an emergency. 

I do my best to let the data do the talking, and right now it is saying inflation.

How long will it last?

The old saying is, Don't fight the Fed.  That's good advice.  I have dutifully been following the developing story by watching what the Fed does, not what it says, and by letting prices tell me which way the wind is blowing.  It's a regrettable position to be in, because it's nearly impossible to make any long-range plans when you have no idea what the Fed is going to do next.  But here we are.

How long the stock market rally will last is therefore unknowable, but stocks and bonds and commodities will remain elevated in price for as long as the Fed continues to dump hundreds of billions of thin-air money into the markets.  The only problem is that there's no clear exit strategy for the Fed.

Putting money into the markets is a very easy thing for the Fed to do.  Letting rope let out under full sail is easy; tugging it back in is difficult.

The Fed faces a similar asymmetry.  Market participants are always eager to take fresh money hot off the press.  An infinite number of things can be done with that money almost instantly.  But coming up with money to give back to the Fed for Treasury of MBS paper?  All sorts of difficulties arise.

"Wait, we'd have to sell a lot of things to free up that kind money and what, exactly, are you proposing to hand us in return? Treasuries? Um, no thanks, not right now. Agency debt? Uh, no, that doesn't fit our portfolio needs right now either.  Perhaps next week?"

Further, when the Fed goes to get its money back from the marketplace, that action will drain liquidity, creating ripples throughout all sorts of markets, especially and including knocking the stock market down.  Very few people complain about adding thin-air money; a crowd roars its disapproval for the reverse.

Too Late

The bottom line is that by the time the Fed becomes institutionally aware that inflation is raging across the globe - and I often wonder when they'll finally awake to the threat - it will be too late.  Inflation will have the momentum, and it will take a vast overreaction on the part of the Fed to restrain it.  They'd have to drain enormous amounts of liquidity and tolerate vastly higher interest rates to be able to do that, and I doubt they have the courage for such bold action.  I think they will hesitate, equivocate, and ultimately be late.

History suggests that inflation is best tamed early, but the Fed is already late and demonstrating a remarkable callousness by doing the exact opposite of fighting inflation.  While we cannot know what it is that the Fed sees, or which demons it is fighting that provide the internal rationalization for risking a hyperinflationary outcome, we can only conclude that these threats are more spectacular than the alternatives.  

Unfortunately, these events conform to the main themes that I have been writing and advising about for the past several years.  Sadly, they are not a surprise at all; the only mystery to me so far is how they have managed to carry on as long as they have.

Events of the past few weeks - unrest in Tunisa/Egypt/Jordan, skyrocketing food prices, Dow cracking a 2-year high, dropping dollar with rising bond yields - make me even more confident in the conclusions of my recent report on How This Will All End (published January 12) in which I derive a calculated estimate of when a final fiscal deterioration will overwhelm even the best of intentions. While the money-printing-induced high we're currently on may feel fun today, the unavoidable inflationary smackdown we'll experience tomorrow most certainly will not. 

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jus_lite_reading's picture

Fact- the EU/UK/US empire is insolvent. What the Fed is doing is simply buying time. So far, they bought 2 years, 5 months. Little did they know, 2 years, 6 months is the limit of time. End of story.

Josh Randall's picture

@jus Here, Here great assessment! They are buying time until all their cronies have their golden parachutes ready and then the permanent answering machine message will be on at the Fed while the world burns and no one is seemingly at the throttle. Thats my prediction 

Oracle of Kypseli's picture

Waiting for the five year statue of limitation? late Nov 07 to late Nov 12? 

Larry Darrell's picture

I've almost convinced my dad to get his assests out of the game.  It has taken me longer than I ever dreamed to get this far.

I finally laid it on the line last night, as he asked me the same question posed by the author: "How much longer can it last."

I told him when oil hits $120/barrel, this round is over.  Deflation kicks in.  More last ditch programs. Rinse, repeat.

We had dot com.  Housing bubble gave us 6-7 years before the bust.  This bubble has given us almost 3 years already.  When oil hits $120 it blows again.

Notice the bubble half life getting shorter.  We've seen this with currency interventions around the world.  Half life is shorter and shorter.

BORT's picture

We need the old Volcker rule.  It will hurt everyone that was not short or in cash

66Sexy's picture

perhaps the 2008 regulatory capture insures a permanent melt up condition for stocks?

Jack's picture

What the fed sees is that the US government is bankrupted.  They can't fight inflation because they must monetize debt in order to keep the government financed.  For as long as it lasts.

gold mining ceos are idiots's picture

They cannot raise borrowing costs as the interest component explodes and to top it off, it destroys any and all hope for the big banks to ever recover the enormity of their balance sheet losses.


Not sure why Martenson need so many lines to state the obvious.

SheepDog-One's picture

Good article, but yes 1 paragraph could have sufficed stating all the FED has is lies and massive injections of fake money so they can live to pump the BS again tomorrow.

RockyRacoon's picture

How much fun would 1 paragraph have been?  A fella can't catch a break around here!

Too much info -- or too little.  

I thought it was just right!

milbank's picture

"How long the stock market rally will last is therefore unknowable, but stocks and bonds and commodities will remain elevated in price for as long as the Fed continues to dump hundreds of billions of thin-air money into the markets."

Wow!  I never would have guessed. 

As usual with Martenson, he uses a lot of words to give me an answer I already know or tell me in a long-winded article that he doesn't know the answer to the question he proffered he had an answer to.

Eman Laer's picture

Suggestion: Don't read Martenson. That way you won't have a reason to make posts like the above.

Popo's picture

The Fed probably sees very little.  Religious zealots never do.



NOTW777's picture

"by the time the Fed becomes institutionally aware that inflation is raging"

they know now - this isnt a matter of becoming "aware"

redpill's picture

Exactly, I don't understand how CM doesn't see this. The Fed knows there is inflation, and more coming. Even if they wanted to stop it, they couldn't. Raising rates substantially is not an option.

They will print until the current dollar dies, and their Wall Street buddies will use all the increasingly worthless paper money to run up stocks and suppress PM prices until the eleventh hour when they finally bail into commodities and gold so they have a stake in the new dollar. Everyone else is fucked, of course.

sushi's picture

They would have to rotate out of 350 billion plus of equity investments. Who are they going to offload that to?

Foreign investors? I think what is taking place is more visible from outside the US than within it.

Public? The same folks who face stagnant incomes, declining home equity, lack of credit, and higher living costs? These folks are going to snap up 350 billion in equities?

Pension funds? These are still trying to come to grips with the utterly fantastic quality of the MBS they purchased.

My sense is the TBTF are plowing into equities as they have no other outlet for the cash. They aren't lending. And when they attempt to exit they all know 350 big ones will not fit through the narrow exits all at once.

So what is the exit plan. I don'tthink they have one. This is just mindless improvisation with no concept of how it will play out. It is Wile E Coyote out over the canyon, feet churning like mad, trying to get to the non existent other side.


Racer's picture

The Fed are trying to build a barricade with a house of leaves to fool everyone into thinking that if they can't see the tsunami of debt approaching it doesn't exist and won't cause any problems... until.... like a tsunami.....

dick cheneys ghost's picture

no inflation in iceland................hmm, wonder why

EZYJET PILOT's picture

There is no recovery, show us one without the aid of QE, then it's a recovery. Stocks are going up but so what, you're spending power is down to the same magnitude. The fed is still a fraud and the crooked banks are still profiteering from the collusion with POMO.

Johnny Lawrence's picture

Bernanke & Obama know the stock market is their only hope to keep power.  Obama even led off with a stock market reference in his SOTU

crosey's picture

IMHO, they have already lost their power, but are riding the bomb all the way to the ground.

They've painted themselves into a corner in which neither has either the brains or will to admit, and remediate.


LooseLee's picture

Well, this manipulation of the stock market is a fom of COMMUNISM! It is immoral and against EVERY tenent this country was founded on! I cannot believe the sheeple of the USSA tolerate it. We mock the Egyptians and ohers who stand of for what is right and just. We have become the Russia of the 60's and 70's and the HYPOCRITES of the modern age with our crony capitalism. The banksters, traders, money managers and others who participate in this ponzi lack integrity and have no business calling themselves an American. Heads off for any and all who support this communist policy in the USSA!

thepigman's picture

What demons the fed is reacting to?

Lack of loan growth at the TBTF bankster

level....increased debt has launched every recovery

in the past 30 years. This time the debt is too massive

to go higher, so Benron has been feeding the TBTFs

 speculative stock gains while hoping for loan

growth. Forget about it. It's over.

thepigman's picture

The demon is that the TBTFs are now so

big they can no longer feed themselves

and are going to starve.

SheepDog-One's picture

Yes exactly correct I believe.

Quinvarius's picture

They will print until the banks become solvent.

thepigman's picture

Actually, he won't print beyond QE2

because inflation kills banking, and

banking is Benron's master. The bankster

herd must be thinned more dramatically

for banking to survive and this what keeps Benron up at


SheepDog-One's picture

'Too big to fail' Ive been hearing that from these assclowns for 2 1/2 years and you can believe how I want to punch their teeth down their throats every time I hear these ivory tower bastards say it. Too big to fail...bunch of rotten dirtbag suits, while they see 320 million people as nothing but useless eater interest payment slaves. We'll see how it all works out, pensioners not able to afford a scrap of food and Egypt riots right here!

Nels's picture

Inflation kills banking?  Maybe the small town banks, but not TBTF banks.  Inflation benefits those who get to handle the new money first, and that's the big banks.  As long as they get 3% on the Fed/Treasury arbitrage, why should they fear inflation?

LostWages's picture

"They will print until the banks become solvent."

So true...also until the pension funds aren't underfunded.  Stealth bailout with market gains.

SheepDog-One's picture

And in doing so, theyll have their vaults full of totaly worthless dollars, pensioners can still get their check, maybe, but that wont matter since gas will be $15 a gallon and food will be so high no one can afford anything.

LongSoupLine's picture

Hmm, NatGas the only big underperformer and it's announced BP is now under investigation for NG price supression.


Other than that...silver beotchez! 

alexwest's picture

i dont understand either im fucking smart, or rest of is fucking stupid..

# "QE3 may get discussed" at future Fed meetings, as #Kansas City Fed President Thomas Hoenig said on Feb 1st?

why everybody think QE is gonna stop??? does anybody understand that sole purpose is QE_nnn is monetize debt or FINANCE US FEDETAL DEFICIT..

does this idiot 'Chris Martenson' undeRstand anything about federal budget AKA real money not bullshit meaningless stats from BEA\BLS\etc..

US GOV SPEND 2 $ FOR EACH 1$ IN TAXES.. PEriod.. its that simple... or basically US GOV is bankrupt , and no matter what FED/COngress/Treasury do in 2,3 eyars
its gonna BE HYPER INFLATION .. 20-30-50% per year..


no matter what stats fo GDP/BLS/ are.. this hole cant be digged out.. even doubling all taxes wont balance budget..

so my point is WHY to be SURPIZEd.. ???


Commander Cody's picture

Actually, we're all fucking stupid for letting this happen.  Too bad.  You have it correct, in my opinion.  The Fed will not stop printing until the great implosion, wherein, we are all screwed, except for the the very rich.  They'll have their PMs and exhorbitant amounts of worthless fiat to tide them over.  They'll even have the support of the military, for a while.  The government has been bought - lock, stock and barrel by the TBTFs, and, has been creating the socialist state of their dreams while totally ignoring the cost.  Greed has brought us to this point in time.  Fiscal reality will one day dawn on this "market" and then it will not be greed that drives it, but fear and survival.  Are you prepared?

alien-IQ's picture

When you socialize the losses and privatize the profits, that's not called "socialism" that called FASCISM!

Commander Cody's picture

The government has been bought - lock, stock and barrel by the TBTFs

Agreed - we have a fascist government; however, entitlements galore for the common folk = socialism.  So, it must be a hybrid: fascist/socialist.  Certainly not democratic or federalist or a republic.


ATM's picture

20-30-50% per year???

Try per day or hour then maybe it makes more sense. When it hits people can't spend every dollar they have fast enough. It will all come flooding in and prices shoot up by the second until no one will accept a worthless dollar for a real thing.


Johnny Lawrence's picture

I like this line:

Very few people complain about adding thin-air money; a crowd roars its disapproval for the reverse.

This is the shit I've been telling my clients on a daily basis. It's like dealing with retards.

SheepDog-One's picture

Well Ive been complaining about adding thin air money all along. I dont know about the crowds roars of disaproval for the reverse, well those ones will be starving retards pretty quick.

Seer's picture

Pulling the tit away should be pretty easy to explain.  If you want difficulty, try getting people to understand the dynamics of "economies of scale" in reverse.  I've been trying to push this out there for quite a while.  I think that if people take a minute or two they can come up with the visual on what this means... but, everyone's been so brainwashed into believing that it all goes on forever.

Not only does the Fed NOT have an exit plan, but the System doesn't as well.  That which cannot go on forever, won't.  The question that people need to ask is: do you have Your own exit plan?

Blindweb's picture

The Fed is fully aware of the inflation they're creating.  The fed knows this is the end game for the current system.  Survival is all they care about.