Guest Post: Fed Goldilocks Ignites Firestorm, Three Bears Now Homeless

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Fed Goldilocks Ignites Firestorm, Three Bears Now Homeless

Under the guise of engineering a "Goldilocks" recovery, the Federal Reserve has instead heated up yet another bubble which is now imploding.

The Fed has long played Goldilocks to the U.S. economy, claiming the ability to avoid overheating ("too hot") or contraction ("too cold") and thus engineer a "Goldilocks, not too hot, not too cold" economy. Let's look at a long-term chart of the S&P 500 to see how successfully the Fed's Goldilocks has achieved a steady-state of merely "warm."

Things swung from mighty hot to mighty cold and then back to boiling from about 1995 on. This chart shows that the Fed's claim to Goldilocks powers is pure hubris: what the Fed excels at is not maintaining a "warm" economy of steady employment and low inflation but a bubble economy of rampant speculation that inflates huge asset bubbles which then boil over and take down the real economy, which quickly chills to contraction and recession.

In its hubris-soaked over-confidence with matches and the gasoline of credit creation and market intervention, the Fed has cranked up the heat and lit a conflagration which is burning down the three bears' home and indeed the entire global economy. Exhibit B: a chart of the NASDAQ:

The Fed got cocky in the late 90s bubble and once again in the Travesty of a Mockery of a Sham 2003-2007 "Rally." It certainly seemed to those adjusting the flame that constant manipulation of the credit markets and cloaked intervention in the equities markets could be extended forever.

But heating up credit, leverage and risk bubbles only offers a facsimile of "warm." The more apt analogy is a pressure-cooker set on a burner cranked to high heat. Eventually the pot explodes.

There's a funny little thing the Fed thought itself above: unintended consequences. By cranking up easy credit and zero interest rates, then you loose the dogs of speculation, not wise investment. (Duh!) By lighting the fire of speculation in the housing market and inviting everyone to join in the bonfire, from people with no capital at all (love those no-doc loans, baby!) to those with the craftiness to originate "risk-free" mortgage backed securities via the legerdemaine of embezzlement, misrepresentation of risk and fraud, the Fed created a bonfire of extreme vanities.

Quelle suprise, another bubble is conjured up and then implodes. (Why oh why couldn't it expand into the stratosphere and then head for the moon?) Only the housing bubble was different: unlike stocks, housing was the bedrock asset of two-thirds of the nation. It wasn't just a $5,000 IRA account which blew up, as in the 2000-02 stock meltdown: it was the core of their lifetime assets.

Supremely confident (or was it just supremely desperate?), the Fed cranked the burners up to high in 2008 and then started a roaring fire in the fireplace with its massive QE1 and QE2 interventions. Having learned nothing from the firestorm created by its last credit-speculative bubble, the Fed once again pumped trillions of dollars into the wrong hands, encouraging rampant speculation and abuse of credit in all the wrong places. The result is: the current "overheating" bubble is popping.

The big fat classic wedge that stocks traced out has now broken down.
Feast your eyes on these charts:

It's a cycle that the Central State and its proxies cannot abandon. Keynesian intervention was supposed to work only in key moments of massive credit contraction. (It took a global war in 1941 to "prove" the value of that proposition.) But the political pain suffered by politicos during the necessary ebb tides of capitalism was too much to bear, so the Central State sought to "fine-tune" the economy continuously with ever larger applications of fuel.

By the time the Fed moved to straight gasoline, nobody in the Central State even batted an eye: whatever it takes to create the illusion of "growth" was fine with scared politicos.

So now Goldilocks has burned down the house and the three bears are homeless. Who can blame them for wanting to evict Goldilocks and take away her matches and gasoline?

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Spalding_Smailes's picture

So if the market is up over 12,000 in 2-3 weeks when the middle east cools down, will this bum post that his charts should be on the bottom of a bird cage ?

cocoablini's picture

The market is fighting off the positive forces of POMO, QE and the negative forces of profittaking, fear of no more QE, insolvency and PImCO's sell off shocker.
PIMCO dumping 100% and going to cash is basically a frontrun on higher rates that are needed to get people to buy bonds. Short rates will remain low, but the mid and long end are the only way to ensure bonds are a decent return considering the possibility of some sort of default

Judge Judy Scheinlok's picture

666 Bitchez. Lucifer Haines generational low.

Timmay's picture

Cools Down? Bernank is fire bombing the whole Middle east now. Rumsfeld is somewhere right now pissed off that Bernanks' "shock and awe" was greater than his.

boooyaaaah's picture

It's not the Feds Fault

They only create money

It's the entities that get the money --- first --- that create the bubbles. And the Fed feeds bankers first, after all they are bankers themselves you know.

And since the banksters get the money first what did you expect GS JPM etc to do with the still wet green backs. They are investment bankers so they invest.

And instead of investing in railroads, factories or other old capatilist projects that pay down their loans with profit generated,

 No they invest is dotcom stock bubbles, or thin ice mortgages  through their hedge funds henchmen using gimmiks to convince themselves that the risk can be mitigated.


And then because they are investment bankers they can get out first OR they can get bailed out first.



Financial_Guardian_Angel's picture

This was perhaps the best post I read on ZH this year. Short, succinct, and lacking any hyperbole. Very nice...

tarsubil's picture

Yeah, I got to here " they invest." and thought, gee, what if they actually invested the money well instead of buying worthless or grossly overpriced carp? Kinda like wondering what if the government bought something of value with the majority of the deficit.

downrodeo's picture

You're either supremely confident or supremely desperate if that is your position. 


I just don't understand why you're such a cheerleader for the pigmen.

Shylockracy's picture

Chairman Bernanke dreamt that he had Satan's beard in his hand. Tugging the hair he cried: "The pain you feel is nothing compared to that which you inflict on the mortals you lead astray." And he gave the beard such a tug that he woke up yelling in agony. Only then did he realise that the beard he held in his hand was his own.

with appologies to Idries Shah, The World of Nasrudin.

Mercury's picture

This pretty much concurs with what Bill Gross was saying a few letters ago:

Globalization has permanently destroyed a huge chunk of middle class US jobs and the Fed has been basically been keeping the credit flowing, fostering a lurch from one asset bubble in an attempt to the next to keep the wealth illusion going...

JenkinsLane's picture

Paul Craig Roberts was warning of the same thing nine years ago.

Hell, it was apparent to anyone with simple common sense. I've always visualised the American economy as a British stately home. Inside, the walls are gradually being knocked down, one by one. On the outside it looks fine but if you look inside you can see the damage. Ultimately, part or all of the main structure will come crashing down, then it will become apparent to any and all observers that something has fundamentally gone wrong. This is not a US-bashing post, the same is true in the UK and throughout large parts of the Western world.

The Western economics profession as a whole, together with the majority of financial journalists, are a disgrace for not having borne witness to the obvious. Hell, journalists are just paid shills pretty much. In my experience academic economists are primarily interested in their nonsensical models, which are so far abstracted from reality as to be useless (all market participants are equally informed., etc), and getting as many papers published in peer-reviewed journals as possible. (Although that's partly how colleges used to be funded and judged across the pond.) Students took second place, God knows what place reality was in. Hell, avoidance of reality was the reason at least a third of them were academics.  

Sam Francis sumed things up nicely with his theory of the New Class, itself based upon the theory of James's Burnham's Managerial elite, the latter based upon the Classical Elite Theory of those wily old  Italians, Pareto, etc.

Globalisation was only ever about one thing - the transfer of wealth, and consequently power, upwards; from the Western middle class to the Western financial elite and partly to workers in the developing nations, from the many to the few.


IBelieveInMagic's picture

As long as the US and other developed economies desires to consume more of the essential commodities (energy, etc.) that has to be imported from other countries, there is no way out of participating in a global trading system -- we gain some and lose some. Can't have it both ways.

The financial system that took shape in the 70s (I am looking at Kissinger) allowed populated commodity deficit countries to cooperatively work together to force relatively sparsely populated commodity surplus countries to trade their commodities on our terms (USD). Otherwise we would have had to continue engaging in active (but fruitless and costly) competition with other commodity seeking countries. This arrangement that Nixon/Kissinger put in place allowed commodity deficit economies extract commodities from commodity rich countries on our terms and to get the participation of countries such as China, we had to offer trade arrangement that created jobs (you will recall China was emerging from the disaster of Cultural revolution).


Globalization allowed for us to overconsume for over 4 decades -- it appears that now that free ride is coming to an end... To hold on to the delusion that it would have been glorious if we had not engaged in globalized trade is an exercise in futility -- we can afford to be insular if only we did not crave others countries commodity riches.

Guy Fawkes Mulder's picture

These are arsonists! Paulson, Tim Geithner, Bernanke -- they're ARSONISTS! They're asking for more MATCHES! And the Congress is saying "Who do we make the check out to? Who do we send these matches to? Is A TON of matches enough? Can we send you SOME GASOLINE to go with those matches?

Max Keiser, interviewed in Fall of the Republic:

AccreditedEYE's picture

+100.  If only they had let the wash out occur when the original crash was occurring, we could have been on the way back to a sustainable long term trend upwards by now. Only pain acts as the agent for change... and we will eventually be forced to take pain and make the difficult structural changes required to correct our sad current situation.

johnQpublic's picture

nice campaign slogan had obama adopted it

pain and change


pain you can believe in


buddy can you spare some change?

got any spare pain?

AldoHux_IV's picture

Fuck the fed. It's a plague upon society-- all central banks are.

Zero Govt's picture

the Time of Questioning has begun...  good 

GottaBKiddn's picture

It is important to see that the Fed is performing perfectly in the eyes of their handlers. This is how they make their greatest profits.

carbonmutant's picture

"But heating up credit, leverage and risk bubbles only offers a facsimile of "warm." The more apt analogy is a pressure-cooker set on a burner cranked to high heat. Eventually the pot explodes."

Actually at some point you run out of fuel.

AntiMort's picture

The author is falling into the Fed's trap of saying the Dow/S&P/Nasdaq are the economy.  Not true.

Fred Hayek's picture

Former Fed chief William Martin famously said that his job was to take away the punch bowl just when the party was getting started. 

Greenspan and Bernanke stand by the table with the punch bowl and cups dropping roofies into everyone's drinks.

Andy_Jackson_Jihad's picture

And the bankers are the rapists.  Their wangs are the politicians and the rubbers used to catch the "DNA evidence" are the media.

Lets keep this metaphor going!

dick cheneys ghost's picture

off the grid in this our future?

Seasmoke's picture

exactly why Greenspan should be in jail or executed , not getting paid consulting Pimco

Temporalist's picture

Newport's Ortel Discusses Stocks, Inflation, Strategy

JR's picture

Mr. Smith goes to Washington - in this case not Jefferson Smith but Charles Hugh Smith - overturning the tables of the money-lenders, and this time the action is directed to none other than the Federal Reserve Bank.  Congratulations are in order, Mr. Smith, for one of the most illuminating thrusts yet into the dark recesses of the Fed.  A Fedbuster! Mr. Smith.

Congratulations also are in order to Mallory Factor for the following quote from Nominations That Really Matter:

“What if I told you that there is a secretive organization that operates in America and influences geopolitics more than almost any other organization on earth?  An organization that controls trillions of dollars—and affects many aspects of your daily life, whether you own a home, how much your mortgage is, and how much your money makes in the bank?  An organization that holds its meetings in secret and that is ruled by people who, once appointed, are basically accountable to no one?  Without meaning to sound conspiratorial, there is such an organization: the Federal Reserve...

“…America still is not paying sufficient attention to what the Fed does and how it does it.  

“For example, did you know that Kevin Warsh is resigning from the Federal Reserve Board of Governors, seven years before the expiration of his term?  “This should be big news because it means that President Obama will have filled every Presidentially-appointed seat on the Federal Reserve Board, except for one.  Given the Fed’s impact on every aspect of our economy and our prosperity, you’d think this would be at least as big as the Super Bowl or the Oscars.”  – Mallory Factor, Common Sense, March 3, 2011, Forbes

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.

Longs please be careful.

Caviar Emptor's picture

They lucked in to Goldilocks, they can luck out of it. My prediction is that the set of conditions which made it possible have come to an end. Going forward there's less and less of a buffer against inflation

equity_momo's picture

LOG CHARTS PLEASE!!!!  jesus h christ this is a pet peeve of mine. that first chart especially is utterly pointless.

woofer's picture

I'd like to offer an alternative view, in that I think that the Fed knows EXACTLY what its doing. It's trying, and quite successfully I might add, to destabilise China. The Fed has worked out how to use debt to do so. That's why none of the policies really make sense, that's why both Greenspan and Bernanke deny reality and seemingly persist with policies that just make economic matters worse. Firstly the US doesn't tolerate a rival. John McCain's recent utterances to the effect that China is a danger and must abide by international rules and keep sea lanes open is a case in point. Not only that but there isn't enough oil around to accommodate China's growing demand, and the rest of the world's. So the US is using its tried and true technique of promoting a bubble in its victim and then when the victim overheats pulling the money out, causing a crash there. In simple terms, its hot money in then hot money out. Recall Japan in the late 1980's and the fate of the Asian tigers in the 1990's. In Japan's case, its fate was buried in a global boom, just as China's is buried in the current overall emerging markets boom. And don't forget that the Chinese are changing over their leadership next year, but the horse trading is going on right now. If the US can discredit the leadership while at the same time fomenting increasingly difficult economic conditions in China that foster civil unrest, they may be able to bring about civil protest and destabilisation. The main Wall St banks are advising clients to pull money out of China and put it into large cap US stocks. Here we go. Tighten your seat belts!

michigan independant's picture

Senate floor debate mentions in 2005 unsustainable policies. Game the Taxpayer like you pay no one a cent more than to make them quit. Birds pecking at mirrors move on. They do not even pretend who there masters are. What you need will go up and what you want is not a issue anymore. Welcome to Central Planning or the misdirect core inflationary tales.

dirtbagger's picture

I think you have a good point here, HOWEVER

Asia has developed long past the point where the US can unilaterally destabilize their economices.  The BRIC and EC countries are sailing on their own independent future course, while the US is still trying to find the assembly manual for the log raft.

Like our foreign policy, our economic policy to protect US interests is about 20 years behind the rest of the world

TeresaE's picture

Jokes on the fed, and you, then.

China/Asia supplies over 60% of our processed foods.

Over 50% of our prescription meds.

More than 60% of clothing, technology, nuts and bolts.

Plus they have more actual CASH than we do.

"Destabilize" them.  What a crock.

If/when China decides to finish us off, we could virtually overnight become a third world country.

Great job Ben, the Banksters and their enablers.

TeresaE's picture

Jokes on the fed, and you, then.

China/Asia supplies over 60% of our processed foods.

Over 50% of our prescription meds.

More than 60% of clothing, technology, nuts and bolts.

Plus they have more actual CASH than we do.

"Destabilize" them.  What a crock.

If/when China decides to finish us off, we could virtually overnight become a third world country.

Great job Ben, the Banksters and their enablers.

bunkermeatheadprogeny's picture

Pulled completely out of equities last week of Feb. Just eating popcorn now.

naughtius maximus's picture

I got out yesturday even before I read about pimco or this story:

Not quite the top but I'm satisfied for now.

woofer's picture

And totally agree with equity_momo: Log scale charts!!! Arithmetic charts are useless for showing accurate patterns and trends and trend lines and support and resistance levels.

flattrader's picture

I like

Some of those guys and gals are damn good.  Different styles abound.

flattrader's picture

CHS writes for an entirely different crowd.

He reporduced index charts with notations for this article that have been kicking around for the past week or so on various websites.

There's nothing new or useful here for the majority of readers.

...and you would have to know what a log chart is to understand why it might be useful.

jmc8888's picture

And right now you can buy principal risk free muni bonds, it was on the radio yesterday (and a million times before).


JR's picture

Diamond Fed Nomination Likely to Fail Again, Shelby Says

Bloomberg (Mar 10, 2011) - Nobel Prize-winning economist Peter Diamond is likely to fail in his third try at confirmation for a seat on the Federal Reserve Board, said the senior Republican senator overseeing the central bank.

“We’ve blocked him twice,” Alabama Senator Richard Shelby said today in a radio interview with host Laura Ingraham, according to an audio clip distributed by his office. “I think we’re going to block him three times…

 “The administration can do better,” Shelby, 76, said in the interview after repeating his criticism that Diamond has insufficient knowledge of monetary policy. “What we need on the Fed is somebody that’s not interested in just printing money.”

Additional info from Wikipedia Peter Diamond (economist):

Diamond wrote a book on Social Security with Peter R. Orszag, President Obama's former director of the Office of Management and Budget,[3] titled Saving Social security: a balanced approach (2004,-5, Brookings Institution Press).[4] An earlier paper from Brookings Institution introduced their ideas.[5]

On April 29, 2010, Diamond was announced by Barack Obama as one of three nominees to fill the three vacancies then present on the Federal Reserve Board, along with Janet Yellen and Sarah Bloom Raskin.[6] On August 5 the Senate returned Diamond's nomination to the White House, effectively rejecting his nomination.[7] President Obama renominated him on September 13.[8]

Ben Bernanke, the current Chairman of the Fed, was once a student of Diamond.[9]

Diamond was awarded the Nobel Prize in Economic Sciences in October 2010, along with Dale T. Mortensen from Northwestern University and Christopher A. Pissarides from the London School of Economics "for their analysis of markets with search frictions".[10]

Doeko's picture

The author is manipulative. You know, I can also make a chart look like absolutely anything by tweaking a bit here and there, but showing a linear-scale chart of half a decade of S&P500 price evolution is STUPID. Especially if you want to exlaim that where we are at is a *giant* double top. There's nothing giant about it, but it may be a double top (who knows). Looking at charts like this is not only manipulative towards people who don't understand how to read a long-term price chart (if you look at a linear-scale GDP chart or in fact pretty much any economic statistic, what is happening now will seem "giant" even though it is really not and what happens in 50 years from now will also seem "giant" and make today look small, on a linear scale).

Anyway, if indices don't tank hard soon, they are not going to in the near term. Europe is obviously being kicked around a good bit but that's to be expected. My dumb money indicators (mainly mutual fund stuff) say that dumb money is fleeing fast even though not much downward progress has been made the past weeks. This is probably not yet the bottom, but it's not very far off and a new high is probably in the cards.

It's also, unlike what I see in the media a lot NOT UNCOMMON for stocks to halve or double in value over the course of a few years.

To add to this, there is no statistical evidence that shows that prices are more likely to break down terribly when there is divergence of the indicators like that because divergence goes away if it fails (i.e. you don't see the failed patterns if you look back on a historical chart unless you run through it or are specifically looking for failed instances), which makes it seem like it is a "foolproof" method but really isn't.

Also, I want to know, where is the irresponsible lending and how will this be a catalyst for another sharp decline in asset prices? I've been looking around but I haven't seen anything that makes me wonder the sanity of it all (in the western world anyways) and from what I see, lenders have been very conservative. The only credit bubble that I see is the European periphery and Japan, but that's really a spot on the map.