Did The Fed Just Give The Green Light To Sell The Stock Market?

Tyler Durden's picture

Remember when the president uttered the magic words back in March 2009, when he said that "profit and earning ratios [whatever the hell those are] are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it" giving the green light for the 2 year bear market rally? Well, if that was global market Risk On, Janet Yellen just gave the Risk Off command. To wit: "forward price-to-earnings ratios in the stock market fall within the ranges prevailing in recent decades, and are well below the early-2000 peak, although corresponding measures for small-cap equities (not shown) appear somewhat elevated....special questions included in the March 2011 SCOOS suggest an increase
in the use of leverage by some traditionally unlevered investors (such
as pension funds and insurance companies) as well as hedge funds during
the previous six months.

" Yup: small caps, aka the Russell 2000, aka the Economy according to the Fed's third mandate. Ironically, the Fed realizes the Catch 22 it is caught in, which we noted earlier, namely that stocks are pricing in QE 3, but for QE 3 to happen stocks have to drop 20% from here. Well, this may be the last warning from the Fed.

Full Yellen speech at the 2011 International Conference: Real and Financial Linkage and Monetary Policy, Bank of Japan, Tokyo, Japan

h/t London Dude Trader

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libertus's picture

Your right. No QE3 without an engineered fall of at least 10%. We are in Humpty Dumpty territory. 

chartcruzer's picture

Thanks to QE, the relaxation of bank accounting rules, and endless stimulus/bailouts we can thank Planet Washington for the shortest bear market in modern history.


Did any of us believe this credit bubble would produce a bear market of only 5 quarters?  What are we going to call the new bear market?  WWIII?

Even with the massive QE2 the major US equities markets have been basically flat for the most recent 4 months.   The markets have lost momentum even with QE!     It is now the debt bubble itself which is the drag on the economy.   Of, course this will never be documented in the popular press.

zebra's picture

let's just say, free-market, liberty, and consititutional rights are all hurting the economy unpatriatic, and un-American, and be done with it. On your way out, please switch off the internet as well.


It is saddening what our leaders has made this country something that I no longer recognize.






j0nx's picture

Our 'leaders' have made it that way because people like you, and I, don't stand up to them. We also keep perpetually voting the same idiots back into office: e.g. Harry Reid and Nancy Pelosi. Americans truly do deserve exactly what they are getting and I feel no empathy for anyone with regard to how this plays out. In other words if you are looking for someone to blame then look in the mirror.

CH1's picture

Party A licks bankster toe and Party B licks bankster toe. And the choice is?

I agree that Pelosi and Reid are exceptionally horid, but there's no salvation from other team either.

Split the system and let it die. Rebuild better.

Frankie Carbone's picture

Only Democrats? No Republicans? 

You are a sheep. 

j0nx's picture

Reid and Pelosi are the worst offenders. You are an ass for even bringing up this partisan bullshit. Looking for the sheep? Look in the mirror.

RockyRacoon's picture

You are an ass for even bringing up this partisan bullshit.

Sometimes the mind reels.  I believe it was you who named Democrats only.

You should have thrown in a couple of Republicans to save yourself the ass-reaming.

That mirror works the same for everyone; it's a non-discriminatory revealer.

DosZap's picture


Please do not throw a wet blanket  on everyone.NOT all Americans got to vote against these pus pockets.

Many here sent a lot of money trying to get new blood in, and old blood GONE.

So to make a statement as you did is not correct nor fair.

ibjamming's picture

But they've got us by the balls.  The rules are stacked in their favor.  Just TRY to run as an independent.  Good luck with that.  Unless you're already wealthy and have a lot of friends...forget it!

If people KNEW what an independent has to go through to get on the ballot...you'd vote for them just because of the tenacity and courage it took!  The Dems/Reps just choose who the best actor, the best convincer, is out of their "pre-paid" buddies and start collecting money.

Campain reform is what we need FIRST.  NO campain contributions at all.  Every bona fide candidate get's equal media time, but NO SIGNS, all paid for by the public.  Each candidate get's an infomercial, stories about their past, their views, etc.  We need to eliminate the parties.  I'd rather have 535 independents locked in a stalemate then what we have now.  The less we get out of DC, the better.

el Gallinazo's picture

I think the best future for all three branches of government would be to appoint them as with jury duty. And institute mandatory death sentences for anyone bribing them. Of course it would never happen and the situation is hopeless. Anyone who thinks that at this stage of the game, meaningful reform could be achieved through the ballot box is smoking hopium. That is not the game plan of the NWO my fellow serfers.

falardea's picture

I was always taught the word "leader" meant a person that did the right thing, even when it wasn't popular.  "Leader" meant men/women of integrity, that you could look to for guidance.  "Leaders" were men/women of the kind of character you would want to emulate....


I see NO "leaders" in DC.  I see NO men/women I would ever want to emulate coming from our illustrious political class, except perhaps Ron and Rand Paul.

Caviar Emptor's picture

If you take the ratio of total market cap to GDP you get 95% as of today versus last year total GDP. Already in overvalued historical territory. 

More alarmingly, this puts the ratio in the same ballpark as 1997-1998. 

Even more alarming, the 1987 pre-crash peak had a ratio of only 66%.


The 2009-present market interventions have had the net effect of preventing the market from working off the post 1995 bubble. And that will weigh heavy for years and years. It also means we're still living in an a world where biflation rules and crushes the real economy for years to come.

DTCC 1999's picture

Great catch Tyler and wonderful post Caviar Emptor. You are a golden oldie gem buried in a box of shit tossing kittie litter. I started trading futures this year and have focused mostly on silver (not a great way for most people to start) but also trade corn, wheat and gold occasionally. I'm looking to expand markets and the TF (mini-Russell 2000) is in many ways easier and more profitable for a 25-500K day trading account than the ES (S&P 500). Though the NQ nasdaq is often used by people starting out.

RockyRacoon's picture

Trading futures = moving paper around trying to out guess how somebody else is going to move their paper around.   Jeebus, is that a career for grown-up people?  Whatever happened to making stuff that people actually need/use, and selling it for a better price than other people making stuff?

101 years and counting's picture

i'm currently betting no QE3 AT ALL.  no point.  they've already stolen over $5 trillion.  there's nothing left to pillage.  they'll short the markets down to 450 from here.

Out9922's picture

Agreed.  If QE3 was to happen, more people will wake up to this scam.  They don't want that.  Game Ova

holdbuysell's picture

It's my understanding that hyperinflation is more favorable than deflation from a bank financial statements' perspective because in hyperinflation, all loans have the chance to be paid in full, thereby preserving the balance sheet; whereas, in deflation, loans default, and cripple the balance sheet. The assets received through default are of lesser value and are costly to unload.

Tyler may have perspective on this.

Caviar Emptor's picture

That's right. And that's why they'll never allow deflation to happen. Defaults due to deflation would not only hurt banks, they hurt wealthy overlords to whom debtors owe money. 

SkySavage's picture

Deflation cannot be stopped IMO.  The debt overhang is simply too large.


Caviar Emptor's picture

True. That's why we're stuck with biflation, I keep saying. We've go deflation along side Fed stoked inflation in the cost structure 

Spitzer's picture

We have inflation with a bear market in housing just like we had inflation in 2000 with a bear market in Nasdaq stocks.

equity_momo's picture

This is so much more profound than the tech bubble though. Its not just housing now either. The real economy has been DISINTEGRATING around us for the past 2 years and yet NOMINAL gains in a simple index has prevented the sheep from scattering.

Rynak's picture

Since when is reason and common sense an integral part of economist strategy?

This isn't about longterm strategy - it isn't even about midterm stragegy. It is all about "make it good NOW".... the only thing that could prevent QE3 NOW, is if there was popular sentiment against it NOW.... and as long as that sentiment can be overridden via market manipulation NOW, the sentiment doesn't matter.

Bottom line: QE only stops, when people stop allowing it, and cannot be made to stop allowing it.

macholatte's picture

That's right. And that's why they'll never allow deflation to happen. Defaults due to deflation would not only hurt banks, they hurt wealthy overlords to whom debtors owe money. 


That would be true except the question is this: who owns the loans? The banks are flush with cash, the Fed, Fannie and Freddie (the US Tax Payer) bought most everything else except some short term commercial paper which is collapsing daily. So maybe the time is ripe for deflation so the banks buy up everything not nailed down, especially PM's at 1960 prices. Good-bye family farm, family business, real estate, etc. The Banksters get the real assets and the tax payers get the oblgation. The Bankster liability is cloaked in a golden parachute, zero risk money fabricated from nothing, US government guaranteed income on money borowed ZIRP from the Fed etc, etc.

Just a hunch, you know cause this is certainly an unusual situation. Or did I miss something?


Diogenes's picture

Banks don't want real assets. They want to finagle the paper, it's easier and more profitable.

If they wanted assets, they already have 1/2 the houses in America and look what they are doing with them. Nothing. Trying not to get stuck with them, palming off the bum mortgages on Fanny and Freddie, putting off dealing with the housing crisis as long as possible.

I_ate_the_crow's picture

Inflation might be good for the repayment of loans, but hyperinflation isn't good for anyone. I've seen people act like panicked monkeys at the grocery store when the forcast calls for a 2-day snowstorm.

Rynak's picture

You are assuming that they care about the majority. If hypothetically the currency were destroyed now, would it change anything about what real goods people own now?

Nope, it would't.

Exchange rate, aka currency is just a means to rule how goods are exchanged - it isn't  the goods themselves.

I_ate_the_crow's picture

Right but ZHers are in the minority, in that we own goods that will retain value regardless of the exchange rate used to trade them. A shit-ton of people have no real assets, no savings, and no PM's, nothing of value to trade in any currency, let alone an environment where the old currency has toilet paper status. Those are the people I was referring to. If they overreact to storms, imagine what they will do when they find out they can't withdraw their money from the bank.

It's going to smack a lot of unprepared people right in the face. They don't care about the majority of people in this situation, and that's what makes me a little uneasy - but I guess that's what martial law and the FEMA camps are for (yikes).

Diogenes's picture

When it comes it will be sold in such a way that the sheeple will be begging for it.

RockyRacoon's picture

If they overreact to storms, imagine what they will do when they find out they can't withdraw their money from the bank.

What money?  I think you meant when swiping a credit card yields nothing.

Hedge Jobs's picture

HBS is spot on. deflation sends the banks broke, hyper inflation sends the people broke. QE3 it is

TruthInSunshine's picture

No offense, but the opposite is true, actually. It's math. Math can't lie because math is essentially circular reasoning proving itself correct based on a set of rules.

Inflation = debtors win.

Deflation = creditors win.


Now, depending on one's view of the big picture, as in the end game, accumulation of money may or may not be as important as accumulation of power (economic and political and military). And that's fine. I have no inside information on the why, what, who, how, when, where, etc. things fall apart and what the ultimate consequence or the ultimate objective, if there is a planned one (and there very well may be judging by many public statements made by some influential people, especially when things have slipped out), truly is.

But from a strictly mathematical perspective, inflation wrecks the value of the loans doled out from the perspective of the lendor who must accept fiat that has since lost value, while deflation wrecks the life of the debtor who took out a loan that has to be paid back with fiat that has increased since in value.

holdbuysell's picture

"Inflation = debtors win.

Deflation = creditors win."

And big thanks to XPolemic with a logical possibility to deflation incentives for the banks.

I absolutely agree. But something doesn't seem right.

Then, why, was Wall Street, an assumed creditor of capital, pounding the table for QE2?

Is EVERYONE in debt over their eyeballs that EVERYONE needs it inflated away?


I think I just answered my own question, but still interested in the board's wisdom.

Roi's picture

Bank are usually short term debtors and long term creditors. They basically make their money as middlemen. This makes them vurnurable to sudden shortages of cash, so the FED makes shure that that thay allways have some at hand.


Also, the banks get their hands on the freshly printed cash before it can have any inpact on prices... Thats why some call it "inlfation tax".

XPolemic's picture

Then, why, was Wall Street, an assumed creditor of capital, pounding the table for QE2?

Roi (above) is correct. Imprudent banks have moved most of their funding to the short end of the curve. QE is about pushing down the short end so banks can avoid liquidity problems. Banking failures are almost never problems of solvency, only of liquidity.

Borrowing at the short end and lending long has been incredibly profitable for banks and Wall Street,and when the curve inverted, nobody wanted to give their bonus back, so the taxpayer had to provide the liquidity. Washington could have let the banks fail, but in all likelihood that would have caused short term money markets to dry up, and most commercial paper is short dated.

However, given the rise of capital managers like GE Capital, who unlike bankers, actually know something about business, I'm not sure if it would have been the complete disaster that the banks claim. There is an awful lot of free capital in the world chasing any kind of yield, and it is quite possible that risk appetites would have increased to provide funding for the commercial paper market. I'm not sure why anyone would care if a bank carrying 70% of it's book in mortgages failed. After all, it would be excellent for the mortgagees, and no great loss to general commercial activity. :)

DonutBoy's picture

One has to distinguish assets and consumables.  Assets, heretofore purchased with debt in the credit bubble, will continue to deflate.  Consumables will continue to inflate as the Fed trys to re-light the economy.  It's not one or the other.

So the effect on debtors is still negative.  Dollars are worth less gallons of gas, but the house bought with credit bubble dollars is gone and all the equity went with it.  Wage increases lag or are skipped altogether because of the surplus labor in the market.

The Fed is smart enough to know that the housing-driven economy is over, and we must export.  Unfortunately, Japan must export, Germany must export, China must export, Greece must export...  The dollar's going to have to get wickedly lower and our standard of living has to be driven down to the level that can be supported with our economic output alone, not output plus borrowing.

I don't think 90% of America has any clue what's coming.  It's going to be ugly.


Variance Doc's picture

The notion that math is circular in reasoning is silly.  Mathematics is *not* circular reasoning at all. The cornerstone of mathematics is set on axioms, e.g. Dedekind–Peano axioms, and the rest logically flow (deductive reasoning.)

TPTB face a simple arithmetic problem.  That is why I believe, there will be some form of QE3; they need fuel to keep the Ponzi scheme going.

stollcri's picture

Too much deflation => strategic defaults => creditors holds assets => creditors want asset price inflation => inflation => creditors win

-and the corollary-

Too much deflation => mega depression => political unrest => ... => creditors loose

Hedge Jobs's picture

thats ok TIS, but math has nothing to do with it which is why you dont understand. In deflation the value of money rises because there is less of it. So as deflation progresses people and business earn less because its costs them less to survive. But the debts that people owe remain the same as they were before the deflation sets in. Its this debt remaining the same but people and business earning less during deflation that forces them to default on their debt as they aren't earning enough in the new deflationary environment to meet their pre deflation debt obligations. these defaults cause banks to collapse a la the great depression. the opposite is true during inflation. In deflation banks go broke, in inflation they dont becuase the debts get inflated away. Have a look into it. Its in the economics section, not the maths section.

TruthInSunshine's picture

Deflation can happen either because the amount of currency contracts, or because the real or perceived value of goods and/or services fall, or both.

Inflation can happen either because the amount of currency expands, or because the real or perceived value of goods and/or services rise, or both.

You are thinking in linear terms rather than relative ones.

And your comment that "in deflation banks go broke" is hard to even formulate a response to, precisely because it's such a broad statement given that you provide no context as to the why the deflation is occurring or the landscape and backdrop of the economy during such a deflationary episode.

In a vacuum, all things being equal, banks are in the business of providing loans, and their portfolio, in the form of both securitized and non-securitized loans, grows in value when deflation sets in, as those owing the bank money provide increasingly valuable payments on those loan obligations, with each and every successive payment to the bank.

XPolemic's picture

In a vacuum, all things being equal, banks are in the business of providing loans, and their portfolio, in the form of both securitized and non-securitized loans, grows in value when deflation sets in, as those owing the bank money provide increasingly valuable payments on those loan obligations, with each and every successive payment to the bank.

Yes, their cashflow increases in value, but the security/collateral for the loan decreases. This has a negative effect on the bank in the following ways

1) Credit migration. As the LTV increases, so does the risk. Traditional lending practices dictate that as the risk increases, so too does the spread. In theory, the bank can pass the risk on to the debtor by increasing the interest rate, but this has the unfortunate side effect of increasing the default rate. The alternative to increasing interest rates is to take a hit in spread compression.

2) Repossession of underlying collateral (i.e. property). If the bank is forced to foreclose on the loan, then it trades cashflow for a hard asset. In a deflationary environment, those assets are depreciating, and appear on the balance sheet as a loss.

3) Economic capital (Tier 1) requirements increase with risk. As the LTV increases due to falling prices of the underlying asset, the risk, and hence Tier 1 capital requirements as increase. In a deflationary environment, the cost of capital should, in theory, increase. This results in a "double whammy" for the bank's cost of capital, more so to those banks that borrow short and lend long.

The long end of the curve is less elastic than the short end, which has proven extremely profitable for banks in times gone by as they traded the vol in the short end while recieving cashflows on the long end. In fact, you could say that the most profitable banks before 2008 will be the worst affected by a deflationary environment, precisely because they were so imprudent.

XPolemic's picture

Not quite.

In an inflationary environment, consumer loans can in theory be paid in full. Commercial paper will be screwed, as discretionary income falls, but that's OK if 70% of your lending book is mortgages.

In a Hyperinflationary environment, the currency's issuer (i.e. the government) loses the faith of it's creditors and eventually sends the value of the currency to zero. It is then usually reissued as something else (Weimar and Zimbabwe), wiping out currency savings.


Once the currency collapsed in Zimbabwe (I treasure my 100T ZMB bank note), the people began trading in gold and USD. In the case of the USG losing the faith of it's creditors, I don't think the USD will be an option, hence the likelihood of trade in precious metals, energy (gas and petroleum) and food would be the more likely scenario.

There is a way that banks can do well in an deflationary environment, they can seize the land that the property sits on and wait for the reset of the financial system. Once the financial system has reset, they can sell the land to new buyers in New Dollars. Unfortunately, land just isn't as valuable as it once was.

During the Agricultural revolution, land owners (farmers) were the wealthy. In the Industrial Revolution, land decreased in value relative to productive capacity. In the Mercantile Revolution, land continued to decrease in value in the countryside, but increased in value in port cities due to access to trade. In the coming Technological Revolution, land value in port cities will decline again, but arable land will increase in value.

Moral of the story: If you want skin in the property game in the 21st century, look for farmland. Even parts of Detroit are being converted to urban farms (soil is quite fertile in Michigan).



TwoShortPlanks's picture

I totally agree, the next crash isn't about money, it's about hanging the noose around someone else's neck, namely Obama!
Now that the market realises the difference between physical and paper it's agreat time for a Flash Fire.

TruthInSunshine's picture

Forget the puppets on the (R) or (D) side of the aisle.

They're truly merely puppets, after all.

A run & gun battle with those behind the Federal Reserve 'Bank' scam, for however long it takes and however many casualties result, is what's needed. This means destruction of all those behind any central bank having ties to the original London Central Bank (now known as the Bank of England).

Unlike the last several times where Patriots thought the Rothschildian Lizard was dead, the spinal cord must be severed with absolute certainty, this time, in order to guarantee our children freedom from a miserable life toiling as debt slaves.

drom's picture

So then the plan would be to let the market crash until banks need another bailout?

I don't think they'll let that happen.  Also without enough buyers of  treasuries, they may not have a choice but for more QE.

bankonzhongguo's picture

The "new" age of Disaster Capitalism mandates the routine and artificial creation of destruction to justify the next, new, bubble.

If the banks want QE3, then they need to sell everything off 20-30% over the Summer.

By August, Harriet Housewife will be begging the Fed to take a second on the banks' dog eared shadow real estate portfolio and MBS on their emergency-generosity "stay-in-your-home" vassal-land-lording rental income from foreclosed families in exchange for newly printed cash.

QE4 - cash for mortgaged children's DNA and timeshares on breaths of serfdom's air.

All of this to cover fake gambling debts.

Never forget what they did to the Republic.

tennisdude's picture

Each time I think the rally is over, the market gets goosed back up. Not even the destruction of the 3rd largest economy in the world could end this. Is the phony rally finally over?

FOC 1183's picture

Damn it, Janet!