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CLSA's Russell Napier - "QE 2 Fails - Sell US Equities - Await The Fed's Plan C On The Sidelines"

Tyler Durden's picture


In his latest Market Outlook, CLSA's Russell Napier, who has long been one of the better big picture strategists, comes to the same conclusion as we did when we penned from last Friday "$440 Billion Drop In Shadow And Conventional Banking System Liabilities In Q4 Gives Bernanke Carte Blanche For QE3" namely that the contraction in broad money aggregates (shadow banking in Zero Hedge's case, M3 in the case of Napier), opens the door wide for Bernanke to usher QE3. "recent data imply that the US reflation is in trouble. QEII has boosted reserves but banks continue to reduce credit, while broad money has contracted. There is material downside risk to equity valuations." In other words - "Sell equities as the market wonders whether there will be a QE3 and in what shape it will come. Napier's conclusion - "Whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." This should not come as a surprise to Zero Hedge readers: we have been claiming since January that the market is due for a major correction in the end of March, early April in time to set the stage for the political wrangling that will inevitably accompany more monetary injections. That recent geopolitical events have forced some to coin the term "Glow in the Dark Swan" only makes the Fed's job that much easier...

Napier's key points:

  • Fed needs to get bank credit growing to get money growing
    • Broad money has contracted since the launch of QEII in November 2010 and this
      suggests that rising growth and inflation are not likely.
    • QEII is boosting unused bank reserves, but banks continue to shrink credit and it is having no direct positive economic impact beyond depressing Treasury yields.
    • Equity-market valuations are close to bubble levels and need the prospect of higher inflation and negative real rates to continue higher: but M3 is contracting.
  • Supply and demand challenges to reflating the USA
    • The largest US banks plan no credit growth, yet the Fed relies on this expansion; otherwise its boost to bank reserves will fail to increase the money stock.
    • Regulatory change, while necessary, threatens long-term stagnation in bank credit and money.
    • Corporate-loan demand is back, but the credit markets get most of that business.
    • The pace of household-sector degearing is surprisingly moderate, but there is no sign of a rebound in consumer demand for loans.
  • Private-sector credit demand weak outside corporate sector
    • Corporations are borrowing, but not through the banks.
    • Banks will accelerate security purchases, but this is unlikely to produce credit growth given the contraction in loans and leases.
    • Velocity has returned to its cyclical peak, but could surprise on the upside.
  • A risk to reflation would send equities sharply lower
    • The failure of QEII will undermine investor faith in a monetary solution.
    • With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside.
      The Fed will try again with a new package, but investors would do best by waiting to see how it plays out.

Full Napier report:

Napier QE2 Failure


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Sun, 03/20/2011 - 09:07 | 1078344 The Alarmist
The Alarmist's picture

All the black swans we've had lately, and the selloff has been less than a hundred points on the S&P ... stop wasting our time & BTFD!

Sun, 03/20/2011 - 09:43 | 1078391 Samsonov
Samsonov's picture

Quite right.  "Watching from the sidelines" means being in cash and losing wealth at a 10% rate.  No thanks.  I know the S&P chart looks very run-up and frightening, so it's occasionally useful to compare it with GLD, which is a rough indicator of inflation.  This comparison shows that for the majority recent periods the market is not up at all.  Since it would be foolish to have everything in GLD, what are the choices?

Sun, 03/20/2011 - 10:02 | 1078447 6 String
6 String's picture

Since it would be foolish to have everything in GLD, what are the choices?

If you're concerned with, say, the next 3 months to a would be insane not to have something on the short side. For a conservative investor, and no I'm not fucking kidding, a lazy portfolio could look this this:

Long Gold/Silver--Short Russell 2000--Long Swiss Franc/Canadian

This should be implemented equally or adjusted according to your view.You can literally sleep well with this portfolio until you know what size and scope QEIII will be....

For a more aggressive, lazy man's portfolio in the next 3 -6 months just leave out the fiat, go longer silver than gold. Short 2000 with an equal weight.


Think about this for a second, if everything keeps going up, it will only be because a mother of all QE's comes next. In which case Silver outperforms the 2000 while you adjust.

If everything goes down, the 2000 will lead the major indexes lower. Offsetting the possibility of GLD going down--though it went up last time we went off QE---and silver. In this scenario, the fiat is sitting their outside the dollar--ready for opportunity.

Sun, 03/20/2011 - 12:16 | 1078827 66Sexy
66Sexy's picture

The FED does QE to create deflation, not inflation.

Why would you think a private institution consisting of international banking interests would do anything that benefits the United States? Shouldnt we consider the FED as a wolf in sheeps clothes? Is the the FED a charitable organization, put into existence to bailout US institutions at a loss and fund endless wars without profit?

Inflation benefits debtors, like the US government. Deflation benefits creditors, like... the Federal Reserve. If these interests wanted to replace the US dollar with a global currency, it would be through a means not indoctrinated by the investment public; which has accepted that inflation is the real force at work.

... and we see the run up in equities as a psychological force of anxiety over losing purchasing power; an entirely created effect. you feel the urge to trade out of dollars and into assets. this being a created effect; why would you trust it? especially, if the source is the Federal Reserve.

Remember the swelling of anxiety when housing was running up? isnt that feeling familiar by now? it is created and ultimately will be replaced by the desolution of collapse... it always has been, always will be.

Sun, 03/20/2011 - 17:35 | 1079224 Oracle of Kypseli
Oracle of Kypseli's picture

Your principle is correct. Deflation does benefit creditors. However, the FED must firstly save the banks and create what it calls "stability and faith" in the system.

Call it what you may, deflation, inflation, asset bubble, Stagflation, wealth effect, etc.

The attempt here is that after the TBTF banks, being the owners of the FED, become stable the FED will eventually unload the losses to the taxpayers.

The attempt of the individual should be to understand the game and devise a plan to, at least preserve some wealth and perhaps profit from it. The working class will always be working class and is somewhat subsdized to stay silent. 

Sun, 03/20/2011 - 21:36 | 1080236 dogismyth
dogismyth's picture

Well I would agree with the deflation hypothesis.  I would disagree that the FED is or wants to save the banks.  I use to believe in that mantra but I see a fatal flaw.  Why preserve a company who is insolvent?  Why would the FED or even the company execs really care about the "shell" of the company as long as $$s can be skimmed one way or another (bonuses, loans).  The fed is pretending to "save" the banks or recapitalize them.  But its just a money laundering operation of sorts.  There is nothing to salvage in a company or its name.  And the banks certainly realize that things are unlikely to experience another credit expansion such as in the recent past.

We are heading down a new road.  Global asset forfeiture and the power behind controlling title of assets by the powers that be.  The "saving the banks' is just a distraction.  Money is being siphoning off and used to purchase the remaining hard assets.  The inflation and deflation arguments are just a distraction as well since a fiat currency will be worth zero at some point in time.  Hopefully, when you are not holding it.  And hopefully when you have completed your transaction for hard assets.

You are all playing a game among yourselves while the treasury in damn near every country is being looted, converted and reinvested into hard assets.  They want you to believe there is a sane and organized ending to this financial magic, and all will be well in the future.  Nothing is further from the truth.  And its the largest ponzi scheme ever, yet you will continue to fools that you are...demonstrated by these articles, comments and meticulous study on the art of trading.

You must stop playing the game to preserve what remaining good is part of the system.  That includes the goods that you have sequester to this point.  Don't think for a moment that you are better off or safer because you have a few million or tens of millions.  You're not in the Big Club and you'll never ever have a "chip" to play in their plush club. 

Their plan has been engineered for years if not decades.  It is meticulously orchestrated to the moment.  Each world event is controlled.  Its all an illusion folks.  Tomorrow will start the week off with all good news.  Imagine that...Japan is better (all of sudden) and the Libya problem will be presented as "fixed".  And your heart will be racing tomorrow as the market gaps up as you throw your money as the cashier for the next roller coaster ride.


Sun, 03/20/2011 - 21:31 | 1080221 rosiescenario
rosiescenario's picture

In our new era scamenomics, the big banks actually want inflation as it bails out their bad loans, improves their balance sheets, gets rid of increasing REO, etc....but most of all, permits the management to pay themselves large bonuses.


Under 'Newtonian economics' you are correct, the creditor would be hurt by inflation and the debtor aided...but we have had a paradigm shift where inflation becomes a 'win / win' situation for both the debtor and the management of the creditor.

Sun, 03/20/2011 - 12:05 | 1078860 Samsonov
Samsonov's picture

I'm not insane, I just think that the environment is unfavorable for shorting anything.  The Alarmist is correct that QE3 (and beyond) is a certainty; therefore, it's unlikely that any hard asset will experience a significant decline in dollar-denominated price.  In other words, the Bernanke put is still there.

Sun, 03/20/2011 - 14:28 | 1079124 JimS
JimS's picture

Short at any S&P above 1300, then buy the dips to 1250. You can use the SDS ETF. You can buy calls or sell puts, as it is an inverse ETF to the S&P 500. You can short individual stocks if you have access to a technical service such as MarketEdge, and there are several out there that do the same thing. This market is in range-bound situation, as long as The Bernank is doing POMO and QE whatever.

Sun, 03/20/2011 - 10:33 | 1078531 The Alarmist
The Alarmist's picture

I know the S&P chart looks very run-up and frightening, so it's occasionally useful to compare it with GLD, which is a rough indicator of inflation.

Try looking at it in EUR terms ... not nearly as remarkable. But if your functional currency is USD, you may as well be all in, 'cos you know QE3 is a done deal.

Sun, 03/20/2011 - 09:18 | 1078351 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

The Bernank is more of a threat to your way of life than Gadaffi, yet i see no will, either publicly or politically, to remove the Bernank from this world.

The USA is a nasty disease and it could have a terminal affect on the world.

Sun, 03/20/2011 - 09:15 | 1078359 Yen Cross
Yen Cross's picture

I worked that chart section. I'ts just the way I'm built. I feel the need to understand.

Sun, 03/20/2011 - 09:17 | 1078365 Cindy_Dies_In_T...
Cindy_Dies_In_The_End's picture

Hi Everyone--


Last week was a record breaking week for the team at ZH as they kept posting article after article to keep us current. Have you considered that the ZH team needs to eat?


I'll spare the Sally Struthers routine, but PLEASE donate to ZH. Whether its just enough to buy the Tylers a beer, or something larger, please do your part.


Parting with $20 won't kill you and you will certainly be rewarded for your efforts by getting all the news that the MSM doesnt have the balls to print.


So don't think--Just Do IT. Support your Fight Club. Right now!

Sun, 03/20/2011 - 09:38 | 1078411 Kina
Kina's picture

Yes, too true. ZH most awesome site on the net. will attend to it.

Sun, 03/20/2011 - 11:59 | 1078838 Abitdodgie
Abitdodgie's picture

I too will attend to it , consider it attended

Sun, 03/20/2011 - 12:11 | 1078888 Whats that smell
Whats that smell's picture

You may do the Sally Struthers routine as she performed in Five Easy Pieces !


Sun, 03/20/2011 - 12:40 | 1078946 sourgrapesson
sourgrapesson's picture

First rule of Fight Club:  You do not talk about Fight Club

Sun, 03/20/2011 - 18:23 | 1079670 RockyRacoon
RockyRacoon's picture

I feel the need to understand.

The need to understand is just a form of control.   Sometimes one has to just let go and deal with the world the way it is.   No amount of charting will replace the peace of mind of knowing that things are just as they are.   Wear the world as a loose garment.

Sun, 03/20/2011 - 09:28 | 1078363 lynnybee
lynnybee's picture

yea, it's a nasty disease, alright !    it's called ZIRP ! CHEAP MONEY !  NO INTEREST PAID ON SAVINGS & BERNANKE has infected this countries precious elderly population !   ......... god help them make it with ZIRP. 

Sun, 03/20/2011 - 09:35 | 1078403 Horatio Beanblower
Horatio Beanblower's picture

“Well, Doctor, what have we got—a Republic or a Monarchy?”

“A Republic, if you can keep it.”


Unfortunately later generations could not keep it.  The only generation that can take back the Republic is the current generation.  The world needs it just as much as Americans need it.  The world is waiting.

Sun, 03/20/2011 - 09:41 | 1078414 overmedicatedun...
overmedicatedundersexed's picture

HB, any idea what asset classes do best when investing under a dictatorship aka monarchy??

seems we need an analysis of same here on ZH.

Sun, 03/20/2011 - 09:45 | 1078418 Horatio Beanblower
Horatio Beanblower's picture

Central banks and arms manufacurers.  One cannot really go wrong.  Tally ho!

Sun, 03/20/2011 - 09:45 | 1078423 NidStyles
NidStyles's picture

Pain, brutality, and starvation. I think they will fall under commodities.

Sun, 03/20/2011 - 09:15 | 1078364 Thomas
Thomas's picture

The nasty decisions going forward really relate to inflation hedges: Do you pull them out and leave yourself exposed to inflation (and runaway hedge costs) to avoid a plunge? Do you sell gold and energy equities? You can get left behind VERY easily in such a strategy.

At one point, a reader asked Bill Fleckenstein to explain why not buy inflation hedges until you can see the inflation in plain site. The answer is that they will cost too much when that time comes.

A whoosh down will hurt but exposing myself to inflation is haunting.

Sun, 03/20/2011 - 09:16 | 1078367 Yen Cross
Yen Cross's picture

Doesn't anyone ask anymore? Equity reduction BITCHES.

Sun, 03/20/2011 - 09:19 | 1078370 Robert Neville
Robert Neville's picture

Why would anyone loan money for a fixed rates in an environment that is sure to morph into hyperinflation if the economy actually starts to grow? If the fed wants banks to loan they need to let the market set interest rates, but then the insolvency of the government would be obvious.

Sun, 03/20/2011 - 21:37 | 1080241 rosiescenario
rosiescenario's picture

...when you are loaning OPM, you don't really just want to make sure that the assets backing the loan are sufficient so that no bad debt loss happens under your watch which might affect your bonus.

Sun, 03/20/2011 - 09:23 | 1078371 Captain Benny
Captain Benny's picture

buy silver, short the indexes!

Sun, 03/20/2011 - 10:57 | 1078629 PenchantForHoarding
PenchantForHoarding's picture

Running out of holes in the back yard to bury the stuff.  Portability is becoming an issue.

Sun, 03/20/2011 - 12:04 | 1078858 Abitdodgie
Abitdodgie's picture

That easy buy a Donkey

Sun, 03/20/2011 - 21:38 | 1080246 rosiescenario
rosiescenario's picture

...I'll rent you some of my backyard if that would help?

Sun, 03/20/2011 - 09:23 | 1078372 Yen Cross
Yen Cross's picture

Ok Now I'm pissed. What is VIX? What is XLF?  What Is Baltic DRY? It bottomed Bioatches. This is for the ladies.

Sun, 03/20/2011 - 09:27 | 1078382 tallen
tallen's picture

Vix is the volitility index, it's based around how many people are buying puts/insurance incase the market goes down. A fear indicator.

XLF is the biggest financial ETF (Electronic Trading Fund) holding all US banks, financial institutions, BOFa, Jpmorgan etc.

Baltic dry index the index tracking demand for shipping capacity versus the supply of dry bulk carriers. I.e. if it goes down, global trade is reducing. 

Sun, 03/20/2011 - 11:41 | 1078785 Richard Head
Richard Head's picture

Exchange Traded Fund

Sun, 03/20/2011 - 09:22 | 1078374 TexDenim
TexDenim's picture

Napier is correct, but he is more of an economic seer than a political prophet. Watch the new GOP congressmen and senators use the prospect of QE3 to push for dismantling of spending initiatives and create tax cuts. There may well be a QE3, but it will very much be the outcome of compromises with Bernanke behind the scenes. The Fed is supposed to be independent of politicans, but that isn't true when it ceases to govern monetary policy and jumps over to run the entire economy, which is precisely what Bernanke has been doing since 2008.

Sun, 03/20/2011 - 23:50 | 1080579 glenlloyd
glenlloyd's picture

The cuts aren't meaningful in any way. They're a minute fraction of what needs to be cut. We will never see serious cuts nor will we see the dismantling of wasteful bureaucracies at the federal level.

That is until the house of cards comes down.

Sun, 03/20/2011 - 09:24 | 1078378 Hannibal
Hannibal's picture


Sun, 03/20/2011 - 15:28 | 1079333 bluebare
bluebare's picture

aka slavery

Sun, 03/20/2011 - 09:29 | 1078383 apberusdisvet
apberusdisvet's picture

I strongly suggest that everyone grab some silver at the bottom of the next raid; things are starting to get really hairy for Blythe; we could have a $10 pop soon.

Sun, 03/20/2011 - 09:49 | 1078427 Long-John-Silver
Long-John-Silver's picture

Should be a huge pop in Oil, Gold, Silver, and the Military industrial complex on electronic trading @ 6:00 PM EST. War profits Bitchessssss!

Sun, 03/20/2011 - 09:52 | 1078435 overmedicatedun...
overmedicatedundersexed's picture

'Should be a huge pop in Oil, Gold, Silver, and the Military industrial complex on electronic trading @ 6:00 PM EST. War profits Bitchessssss!"

body bags , that's a start up business worth looking into..tip o the day fwiw.

Sun, 03/20/2011 - 09:29 | 1078385 Alcoholic Nativ...
Alcoholic Native American's picture

This is bullshit QE never stopped. The anonymous billionaire boys, the FED, have been the buyer of last resort for the private and the public sector.  Without them buying out all the MBS who would be propping up the markets today, wouldn't be any large financial institutions cause they all would have gone bankrupt.  Who would be buying all these government treasuries?  What's the difference between an anonymous billionaire and the FED saying Oh gee we are purchasing more treasuries we will call it QE2!  NOTHING it's the same god damn thing.  QE 2,3,4,5, whatever the fuck they wanna call it is just the right hand movement, WHEN IN REALITY THEIR LEFT HAND IS STILL BUYING AND QE NEVER FUCKEN STOPPED.


Sun, 03/20/2011 - 09:32 | 1078388 lesterbegood
lesterbegood's picture

The Fed's Plan C.

Head for the bunkers.

Leave the suckers holding the empty bag.

Sun, 03/20/2011 - 09:44 | 1078420 Brokenarrow
Brokenarrow's picture

mutual fund managers are behind and hedge funds.........

pleanty pomo coming...........

i left 90% on my cash behind reading these kind of pieces

Sun, 03/20/2011 - 09:53 | 1078433 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

But the FED is not federal and it has no reserves...

... and they are the only hope of a return to 'normality'!? The people of the USA has it's hopes for the future pinned on this criminal entity!?

The USA, and in turn, the world is very very screwed if this is the case. As has been seen in Japan recently, equities can lose 25% of their value in a few days.

I wouldn't touch anything associated with the U.S. given the choice... well, maybe silver eagles, but that would only be if canadian maples became un-sourcable.

Sun, 03/20/2011 - 09:53 | 1078434 silvertrain
silvertrain's picture

 There will infact be a qe3 and 4 and 19 and on and on..The only thing about it is that it will not be announced, In fact , the fed will announce the end of there program..

 See Jim Rickards article on King World News website titled  "QE IS DEAD, LONG LIVE QE"  for the full explanation as the fed can print into the wild blue yonder because there balance sheet has gotten so big..

Sun, 03/20/2011 - 18:33 | 1079706 equity_momo
equity_momo's picture

Indeed.  Yet to maintain a positive effect on asset prices (or inflation) the printing needs to be of an order of magnitude larger than the prior round of printing. I doubt that is possible and therefore you will see QE20 , as in Japan , but it will be during a deflationary environment for stocks and housing , because the Fed CANNOT PRINT FAST ENOUGH to have a meaningful impact.

This paradox will pass many investors and fund managers by.

Sun, 03/20/2011 - 09:54 | 1078438 plocequ1
plocequ1's picture


Sun, 03/20/2011 - 10:16 | 1078491 blazen
blazen's picture

of course there will be QE-n! The point which ANA makes applies here - with everyone's dumping treasurys, their prices go down and interest rates have to rise. If they rise, you have to print more and more to prevent the government from going bankrupt -> death spiral, possibly hyperinflationary

which of course doesn't prevent them from playing small 'correction' here and there - they want markets to ask for next QE, or at least make it appear so...

So the only question is if QE-n is announced or just implemented


Sun, 03/20/2011 - 10:19 | 1078498 I am a Man I am...
I am a Man I am Forty's picture

ZH should discuss the no QE3 necessary due to the fed balance sheet being so large and so many treasuries maturing that this can continue to infinity without a QE3

Sun, 03/20/2011 - 10:54 | 1078619 Gordon Freeman
Gordon Freeman's picture

That is an excellent point, and largely undiscussed in these parts.  In effect, QE II has reached escape velocity, and will keep running on its own steam, without the need for formal QEx program approvals.  Thus, it can officially "end", and just keep going...

I believe this is Rosie's point, as well, as discussed in his latest bulletin.

Sun, 03/20/2011 - 13:52 | 1079120 davepowers
davepowers's picture

Perhaps there are two mechanisms by which QE works to keep things cooking (stock market going up, plus whatever economic benefits, if any). One is clearly psychological. People think QE is expansive, therefore it is. The Bernanke Put. With a cessation of QE, the opposite, contractive, psychology takes hold. Markets fall.

If so, then QE would need to continue from the FED's (and the bank's) standpoint even though lots of QE has already occurred and is reflected in the FED's BS and bank reserves.

The 2nd mechanism is the real money flows from QE. These might also need to expand. In other words, the past QE and the associated skyrocketing bank reserves are to some extent 'spent fuel' unable to keep the whole charade going. So, it's not the overall size of bank reserves that is key, but the fact that they are growing.

We saw a similar phenomena during the 1980s and 1990s, with the realization that ever increasing amounts of credit were needed to achieve a given level of economic 'growth.' Basically, a dollar of credit in 1999 produced a smaller level of growth than a dollar of credit in 1980. Credit was becoming increasingly ineffective in generating growth. So this inefficiency required more and more and more credit - the key was expansive credit expansion. Just sitting there on an already high mountain of debt and allowing it to be rolled off and over was no where near enough.

If the Treasury started operating with a balance budget, then perhaps 'enough is enough' and maturing treasuries could be rolled over with the proceeds of the maturing paper. But gaping deficits means that, somehow, more fuel must be found to keep things going (for a while). So the FED does not have the freedom to simply rest on the bloated laurels of its past QE.

(ps if you're a man, you must be over 40 :) 


Sun, 03/20/2011 - 11:25 | 1078734 The Axe
The Axe's picture

Can't we open a ZH bond trading department, where he buy bonds on the bid and sell them back to the Fed on the offering everyday until the world explodes? 

Sun, 03/20/2011 - 13:06 | 1079000 tom
tom's picture

This is an interesting piece, but it's very wrong on a key point: the claim that excess reserves "aren't fungible in the economy". I'm not sure that sentence makes any literal sense, but I take Napier to mean that excess reserves aren't active in the economy. This is a very popular misunderstanding, so it deserves to be refuted. Please bear with me as it takes some explaining.

Reserves are essentially the portion of their deposits that banks retain as cash. A small amount of these reserves are in the form of currency in the bank's vault, but most are in the form of electronic reserve account balances at the Fed, which the Fed will exchange for currency on demand. Excess reserves are the portion of reserves in excess of the amount that the Fed requires a bank to keep based on its volume and type of deposits.

When two people or companies transact a payment through their banks, typically four things happen: the payor's account balance at his bank is debited, the payor's bank's reserve account balance at the Fed is debited, the payee's bank's reserve account balance at the Fed is credited, and the payee's account balance at his bank is credited. In other words, there is a movement of reserves between banks, which duplicates the movement of commercial bank deposits between the two people or companies. In these kinds of transactions, it's the commercial bank deposits that are acting in the economy, and it would be misleading double-counting to look at the movement of reserves as if it were a separate transaction. Napier and others who portray reserve balances as economically inactive are thinking exclusively of these kinds of transactions. 

However, when banks lend or spend the cash they have on deposit from their clients, they are lending or spending their reserves, and those reserves definitely do act in the economy.

When banks lend to or acquire assets from other banks, this is typically settled with a transfer of reserves from the lendor/buyer bank's reserve account to the borrower/seller bank's reserve account, without any corresponding movement of commercial bank deposits. In other words, banks typically conduct transactions between themselves entirely in "base money", with no "broad money" involved. Banks are conducting transactions with their reserves in this manner in large volumes every working day. For example, they buy stocks and bonds from each other.

When banks lend to or acquire assets from non-banks, typically the buyer/lendor bank's reserve account is debited, the seller's/borrower's bank's reserve account is credited, and the seller's/borrower's account at his bank is credited. As a result, the supply of commercial bank deposits aka "broad money" grows. Napier and others like him look at the total supply of broad money, see at most no big increase, and conclude that reserves aren't being utilized. They are wrong. The reserves are being utilized in ways that expand broad money, but at the same time, other transactions are being conducted that shrink broad money. These are all the varieties of deleveraging, but mostly the writing off of bad mortgages.

Just because the quantity of commercial bank credit is basically flat does not mean that banks are doing nothing. Without all of the QE since 2008, banks would not have the excess reserves to expand credit to the corporate sector and within the financial sector as they have, and equity prices would not have rebounded.

I could also explain how QE has driven up commodity prices, but I think you get the idea.

Sun, 03/20/2011 - 13:06 | 1079002 boeing747
boeing747's picture

A guest in CNBC few days ago said (I didn't remember exact words): 'every day in later afternoon when trade volume is thin and prices drop, a outside force steps in and bids up everything'.

Sun, 03/20/2011 - 13:29 | 1079024 davepowers
davepowers's picture

this weeks update of the FED's balance sheet showed a shift in what looks a check kiting operation on a grand scale.

In the prior 5 weeks, the FED had 'paid' $300 bn to repay most of its loan from the Treasury (SFP), to buy treasuries via QE 2 and cover Treasury checks for govt. operations drawn on the Treasury checking account at the FED. They covered these by borrowing the money from the banks via crediting bank reserves at the FED, which increased from $1.08 trillion to $1.38 trillion.

Last week, QE was small, a purchase of treasuries of only $14 bn covered in part bhy $8 bn of rolloff from maturing MBS on the balance sheet and other small offsets. A net expansion of less than $6 bn is almost immaterial in the context of a balance sheet over $2.5 trillion.

And the FED covered $25 of repayment of the SFP by simply crediting the Treasury's checking account with that amount.

However, bank reserves fell by $44 bn. This doesn't appear to be actual withdrawals by the banks, because at the same time the Treasury's checking account increased by that amount (plus the SFP repay). This gives the Treasury's ability to fund govt. operations a boost since its checking account at the FED got a healthy kicker. To be covered, little doubt, by recrediting bank reserves.



Sun, 03/20/2011 - 13:30 | 1079062 davepowers
davepowers's picture

Re: the repeated claim that the ballooning bank reserves at the FED are 'unused'

Perhaps they are 'unused' in the contest Napier discusses (withdrawal to relend to consumers and businesses), but it is likely that they are not unused in the context of stock and commodity speculation and other hedge fund operations.

Should we really believe that the high command of banks and hedge funds would just let $1.4 trillion in idle reserves just 'sit there' and that they wouldn't have mechanisms for exploiting them? 

One device would be to marry securities lending practices to the bank reserves. 

Here's an example of securities lending - a state govt. investment pool, which is a money market like fund holding tax collections from state, local and school districts, owns assets like treasuries and US agency paper. They earn interest on these assets. Under securities lending, the pool loans the paper out to banks and bank clients (hedge funds) for shorting and other money making operations. The pool gets a small (tiny) cut of the profits. BUT, the pool still gets to show the assets on its balance sheet AND earn the interest on the lent out assets. 

So, under securities lending, it appears on the surface that the pool assets are unused (still on the pool's balance sheet and they're getting interest), while the assets are at the same time pushed into the market to the profit of banks and hedgers, with a small income flow to the pool. 

If this practice were extended to bank reserves at the FED, then it would appear that the bank reserves are 'unused,' while they were at the same time flowing into profit seeking markets. And the most profit making markets to the banks and hedgers these days are stock and commodity speculation, leading to price inflation in those markets.


Sun, 03/20/2011 - 20:30 | 1080017 AmCockerSpaniel
AmCockerSpaniel's picture

If you are right about this s..t in the pool stuff, then a big crash in the market, would make the banks insolvent too. Me thinks FDR was right about banks, and Wall Street.

Sun, 03/20/2011 - 14:26 | 1079203 Grand Supercycle
Grand Supercycle's picture

I'm sticking with my Feb 22 call that the DOW top on Feb 18 2011 signals the end of the rally.

The very overdue Wile E. Coyote correction has arrived and a substantial leg down has begun.

Sun, 03/20/2011 - 14:36 | 1079225 JimS
JimS's picture

If your prediction is true, investors can either buy April/May calls on the SDS ETF, or write in-the-money puts, as this is an inverse S&P 500 ETF.

Sun, 03/20/2011 - 14:30 | 1079208 Al89
Al89's picture

Too much BTFD group think these days. In anycase, a crash would be needed to justify QE3 which has to happen.

This particular dip is the first since August which has seen all indices I watch (DJU, DJT, DJIA, S&P, NASDAQ, Russell 2000 and Wilshere) all confirm a change in trend.

Sun, 03/20/2011 - 14:31 | 1079216 ivars
ivars's picture

Market has already corrected in February 18th and from now on will only go downwards till end of May DJIA reaching 10500, with a small spike in June (11 500) , then continue decline. There will be no reaching of Feb 18th levels in April or May.


Sun, 03/20/2011 - 14:47 | 1079251 TruthInSunshine
TruthInSunshine's picture

I think this question has been asked quite a few times, by many, including TrimTabs CEO, Charles Biderman, whose firm tracks equity market inflows and outflows:

Who's buying equities?


Sun, 03/20/2011 - 14:52 | 1079260 No More Bubbles
No More Bubbles's picture

Who's buying equities?


The Fed is backstopping it every time it tries to go down.  I keep warning people not to short this fucking beast because the collusion is rampant and new highs are coming no matter what the news.  The market is in it's own world.....

Sun, 03/20/2011 - 15:31 | 1079344 TruthInSunshine
TruthInSunshine's picture

Some have opined that The Bernank is genuinely running out of time.

I'm inclined to agree.

Go long warfare, I guess.

Sun, 03/20/2011 - 16:12 | 1079414 Pegasus Muse
Pegasus Muse's picture

Go long Raytheon.  They build the Tomahawk missile.

Sun, 03/20/2011 - 16:52 | 1079504 Kimo
Kimo's picture

Scanned this entire report... not a mention of employment. 

No employment, no credit.  Deal with it.

Sun, 03/20/2011 - 17:00 | 1079527 Cocktosen
Cocktosen's picture

Long oil, silver, and food.

Sun, 03/20/2011 - 18:41 | 1079683 Saxxon
Saxxon's picture

I think the concept that the Fed would somehow engineer a collapse in equity prices in hopes of justifying QE3, is far-fetched as well as running against their basic principle.

It is clear that President Obama and his administration have (1) accomplishment to which they can proudly point - a rising stock market.

Like it or not, the daily DOW performance is what the majority of Americans look to for economic optimism.  Or at least, that is what the Admin thinks and it is what they think, not the reality, that has to be played in this unnatural market.

I do not believe the Admin will seek to tank the one thing they have not going south.  Everything else is going south on them - housing, jobs, spending, inflation and crushing stagflation.

Better to be in commodities or flat in cash, if one is uncertain.  I agree with the posters above that being short is a mistake in this environment.

Disclosure: Flat in cash awaiting a dip in PMs.

Sun, 03/20/2011 - 19:27 | 1079840 Rogerwilco
Rogerwilco's picture

Despite their denials, alarm bells are ringing at Treasury and the Fed over the inflation brought about by the QEs. The Fed could pull liquidity, dump commodity prices along with the markets, and kick China in the rear end. If the drop in the markets is not too severe (say 30%), this would actually be a good setup for the next round of QE and Obama's reelection campaign. Lower prices coupled with renewed QE and faltering Chinese exports would restart hiring in the U.S. economy, and a ramp job for the markets would dovetail nicely with the political season.

Can Bernanke pull it off? Who the hell knows, but so far he's been unstoppable.

Sun, 03/20/2011 - 18:30 | 1079698 RockyRacoon
RockyRacoon's picture

I don't need no stinkin' credit.  I will crash this market single handedly.

Sun, 03/20/2011 - 20:21 | 1079995 Justaman
Justaman's picture

The West was able to accomplish growth over the past decades because of a government led debt expansion, thanks in part a ZIRP or near-ZIRP policy.  The world's leverage limit has been reached unless all fiat money becomes worthless.  The $100 Trillion credit needed by the world as noted by the IMF, World Bank, whatever organization that mentioned it, is obviously an admittance of a failed model.

In my simplistic mind, the relationship is pretty simple:


More debt can't solve an already dire debt problem (unless, of course, someone educates me otherwise.)   


Sun, 03/20/2011 - 21:12 | 1080148 milbank
milbank's picture

This should not come as a surprise to Zero Hedge readers: we have been claiming since January that the market is due for a major correction in the end of March, early April . . .

LOL! Who are you kidding?  Zero Hedge has been on the wrong side of the trade for over two years now.

Sun, 03/20/2011 - 21:44 | 1080150 milbank
milbank's picture

Sun, 03/20/2011 - 21:50 | 1080283 milbank
milbank's picture


Mon, 03/21/2011 - 04:56 | 1080922 Frank Redner
Frank Redner's picture

Im very bullish on equities and im gradually buying more until fully invested over the next month. After all what has happend and it took middle east + oil + japan quake + tsunami + nuclear disaster and the market is hardly down 10%. I think S&P 1550 is a no brainer by now.

Mon, 03/21/2011 - 07:31 | 1081030 tom
tom's picture

I really don't see why this "does QE matter" question seems so hard for people to figure out.

Without QE, we would have had a rapidly shrinking supply of bank credit and broad money as consumers deleveraged (mainly through defaults and short sales).

With QE, most of that consumer deleveraging is happening anyway, but it is being counter-balanced by a rapid expansion of credit to the corporate sector. When corporates increase their borrowing, stocks usually go up, partly simply by virtue of their using the credit to buy back shares and increase dividend payouts.

So if you believe in QE3, you should not be selling stocks here. I'm on the fence.

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