Presenting The Liquidity Bubble

Tyler Durden's picture

Ask anybody to chart the trajectory of the S&P500 over the past 10 years and you will get this chart.

And while the tech boom of the late 1990's was driven by some very real secular shifts caused by unique technological innovation which, aside from the exuberance associated with some of the dot com names, brought a marked benefit to the global economy, how does one explain the subsequent ramp up as the credit bubble was being inflated and subsequently imploded?

Simple - it was all liquidity driven.

The best way to visualize it is to take the SPX and to divide it by the sum of domestic reserves and foreign custodial holdings (a topic discussed on Zero Hedge previously here). The result is that represented on this relative basis, the underlying market did absolutely nothing for the duration of the entire credit bubble. This should come as no surprise to anyone who has been following the theme of the Fed's balance sheet expansion and why the market has been ramping up markedly even, or specifically because of, the Fed's balance sheet growing over the past decade and recently hitting unprecedented levels in the $2 trillion+ range. One can play with the denominator and add other money aggregates such as MZM, but the result would not change materially.

And the scariest part of the chart is the tail end: even with the unleashed dam of liquidity, the market still has a massive retracement ahead of it before it can recover the adjusted losses it has suffered since the last credit bubble. Ironically a 50% run up in the S&P has not been enough to offset on an apples-to-apples basis the unprecedented liquidity efforts let lose by Chairman Ben.

The bottom line is that when viewed from the perspective of liquidity fueling the market, the S&P 500 has never been in a worse situation. And alas, as the Fed's balance sheet climbs to $4 trillion +, absent a multi-year parabolic rise in stocks, liquidity will increasingly lose its power to sustain markets to historical overbloated levels. But Ben Bernanke will go down in flames, and take down America with him, trying to disprove this hypothesis.

h/t Philidor

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JohnKing's picture

psycho-bankers rule.

ewmayer's picture

Sports celebrities are honored by way of "bobble-head" dolls ... For Greenspan and Bernanke maybe we could get "bubble-heads".

Tyler et al, any chance of ordering some bobble-heads painted like Greenie and BennieB (manufactured in China, appropriately) and offering them for sale in the ZH store? would "parody in the form of bobble head" be protected under the 1st amendment, or would offering them for sale negate that protection?

Anonymous's picture

Fighting on a pile of cash!

Punching with fists of cash!

dress them in cash!

Hell, I'd buy one, GD I'm dumb!

sohbetme's picture

I like your ideas and thoughts. While chat and sohbet with my friends talking about it.

Daedal's picture

Unfortunately, people are easily deceived by nominal values.

VegasBD's picture

Unfortunatelty, its probably 99.9% of people

deadhead's picture

Thank you TD....very enlightening analysis.

Joe Sixpack's picture

"...absent a multi-year parabolic rise in stocks, liquidity will increasingly lose its power to sustain markets to historical overbloated levels."


The Zimbabwe stock market skyrocketed in 2007, with acceleration starting in 2005-2006.


Need I say more?

I need more cowbell's picture

Oh no need to say more, comparisons to Zimbabwe are so cogent.

deadhead's picture

C  crosses 1 billion shares....what took so long?

Bam_Man's picture

A keen observation.

In other words, the markets require greater and greater doses of liquidity just to keep from falling at this point.

Apparently the USDX will have to go to 20 before we see new nominal highs on any of the major equity indices.

ptoemmes's picture

I like that...

In other in other words if the market is the patient and liquidity is the drug then the market has a clear case of drug resistance so let's amp up the liquidity until we kill the freakin' patient. 

Death cures all...I'll resist the too easy Michael Jackson analogy except to say he's not addicted to anything anymore.


Steak's picture

There is this old doctors saying...the only difference between a treatment and a toxin is the dose

Deficient Market's picture

Here's the way Stalin put it: “Death solves all problems - no man, no problem.” and it was off to Siberia for all problems.

I guess Ben's quote in history will then be "no market, no problem", and if you insert the word "free" before market, then it's already mission accomplished.

Stevm30's picture

...If monetary growth does not speed up further, the initial stimulus to employment and output will be replaced by the opposite: both will tend to go down in response to the higher wages and prices.  A hangover will succeed the initial euphoria.

It takes time for these reactions to occur.  On the average... roughly 6 - 9 months have elapsed before increased monetary growth has worked its way through the economy and produced increased economic growth and employment.  Another 12 - 18 months have elapsed before the increased monetary has affected the price level appreciably and inflation has occurred or speeded up.

I need more cowbell's picture

Are you on the crack cocaine? Not one thing you said made a grain of sense.

Anonymous's picture

some of it did...his numbers for time lag of monetary
policy effects are correct...

i am not sure if he is talking real or nominal
growth in the economy but under the circumstances
it should be viewed as nominal...

i am not sure that economic output would go down
because of higher nominal wages...

Mediocritas's picture

Shuffling deck chairs on the Titanic.

No amount of bucket bailing will refloat this thing.

Shell Game's picture

and the band played on, as if nothing was the matter...

Anonymous's picture

all the lifeboats have been put out and I missed it. Damn, that water looks dark and cold...

Anonymous's picture

ITs just like drug addiction, you have to keep doing more and more because tolerance levels build up.

Anonymous's picture

Someone attempt to counter the following:

"As long as their are no borrowers, no amount of quantitative easing will harm the economy."

In other words, if the money being created is not borrowed, money supply does not technically grow. Sure, asset prices, such as stocks and bonds may increase due to a lack of borrowers (i.e. financial assets are substituted), but inflation will remain in check until borrowers demand returns. Quantitative easing does absolutely nothing for the real economy in this scenario - neither positive or negative. Look at the Fed data on banks' total loans and leases...

Jim_Rockford's picture

If it doesn't cause inflation, then it won't counteract deflation.  Therfore, harm.

Anonymous's picture

If the newly created money finds it's way to the trading desk of an entity, and bids up stock/bond prices by inducing "sideline" money into the markets; then the real economy gets hurt since that money doesn't go to work but is now just bag-holding the bid-upped prices.

Anonymous's picture

it's horribly you know how qe works????

the fed is increasing its balance sheet by buying
crap no one else wants...these assets will most
likely never be worth what the fed paid thus
causing a loss on the fed balance sheet....

further more it is severely impairing price
discovery and market clearing thus preventing
the cleansing of garbage investment....

it's the most foolish policy the idiot running
the fed could follow....pure price distortion...

andrew123's picture

I think Zero Hedge should take up a collection to put up a billboard somewhere in America with a pricture of Bern Bernanke and the caption "I will buy your garbage at any price".  I am sure the community here can come up with something more clever, but the fact is that one billboard in a major media city (New York, L.A.) would get the attention of the news media alot more than all of the marketwatch and bloomberg stories combined.

Anonymous's picture

Put it on Times Square

curbyourrisk's picture

I vote we put it smack dab in the middle of Time Square.  Preferably over looking the NASDAQ exchange.

Jim_Rockford's picture

and add "Garbage, its got electrolytes!"

andrew123's picture

I am serious about this.  One large billboard will get more attention in the mainstream media than all the bloomberg articles combined.  If you really want to get the conversation started, this is the way to go. ("Bern" was a typo).  I suspect Zero Hedge could raise the money in about 2 days.  Tyler, this would also draw a lot more attention to your website.  Pelase consider doing something like this.

Uros Slokar's picture

Fantastic idea. Plus, it seems to have done wonders for us Atheists, namely the buses and whatnot.

Cheeky Bastard's picture

atheism is as irrational and/or dogmatic as theism is. You have numerous proofs of that; but my favourite one is from Cantor and is goes like this; there has to exist a set which is a set of all sets; and also a set of itself.

and i will add to that; there has to exist a set which is either an operational output of all possible operations on subsets if a) cardinality is finite b) every member of the set is finite or c) cardinality is finite AND every member of the set is finite. Or there must exist a set which  has the most highest infinity ordeal if a) cardinality is infinite or ) at least one of the members of the set are infinite or c) cardinality is infinite AND at least one of the members of the set is infinite.

Cantor basically proved there must exist a set which is a set of all possible ( temporaly independent, space independent, function independent ) sets. 

little bit off-topic ( im sorry ) but; a good thinking practice.


Think about it for a while.

Anonymous's picture

he proved the exact opposite. 'the set of all sets' can *not* be a set:

Anonymous's picture

that's what i was thinking when i read the
phrase "operational output."

jm's picture

You're thinking of a power set construction in a finite space (real analysis uses maximal element arguments).  Cantor was talking about transfinite induction across the continuum. 


Have a look at Cohen's theorem:  there are some things that you can neither prove nor disprove.

Anonymous's picture

It's fun to think people can educate Bernanke and Co, but the reality is: it's alllll partttt of the plaaaaaannnnnn.

Anybody who thinks Bernanke doesn't understand Austrian Economics as good as anybody else is rather silly. Everything rolls the way the Fed wants it to. 'The tables are tilted, the game is rigged.' - George Carlin

phaesed's picture

FYI What's even scarier is take a look at that chart and then take a look at the CPI during the 1920's

Anonymous's picture

Here's somewhat of a consolation - somebody stole Bernanke's purse:

We'll have to settle for the small victories when we can get them.

rD2.0's picture

PETER PETER, I replied this in previous post to your question


HFT1 sells (short) 1000 shares of AIG to HFT2 at $50

HFT2 sells those 1000 shares again to HFT1 at $49

HFT1 sells those 1000 shares to HFT2 at $48

HFT2 sells those 1000 shares to HFT1 at $47

HFT1 sells those 1000 shares to HFT2 at $46

HFT2 sells those 1000 shares to HFT1 at $45

HFT1 sells those 1000 shares to HFT2 at $44

HFT2 sells those 1000 shares to HFT1 at $43

HFT1 sells those 1000 shares to HFT2 at $42

HFT2 sells those 1000 shares to HFT1 at $41

A long term holder gets nervous seeing all that down volume and dumps his 1000 shares at $41. So now there is REAL DOWNSIDE to AIG as real investors are being forced to sell their stock

HFT1 buys 500 shares back at $40

HFT2 buys 500 shares back at $40

So at the end of the day HFT1 and HFT2 have traded 1000 shares again and again between each other and so have zero profit/loss ... but they have overwhelmed the market with enormous volume forcing real investors to sell their stock which HFT1 and HFT2 buy back at lower prices to profit on their own shorts

Obviously 1000 shares is too small a number.

But if they control 70% of all trades, they can do some serious damage this way

Anonymous's picture

Are you serious? Try thinking through your own example a little more carefully.

Anonymous's picture

the scary part is that we WILL again top 1570s and go above 1600 on SPX and then crash all over again...

Jeanbon's picture

I believe, that there is a lot of power

in the Nasdaq, inventors, smart people

who will always be able to produce stuff

that other countries can't or lag behind.

But as it seems today, that the FED policy

jeopardizes a solid economic recovery

so the market will probably have to discount

this next year and has to get much worse

before it can start a sustainable recovery.



tradertim's picture

i live in california and for the next 2 days, california is having a 'garage sale' to get rid of anything it doesn't need. i think the rest of America needs to have this garage sale too before the next collapse.

Anonymous's picture

We have been in a "garage sale economy" all year. I can't wait till consumers get serious about de-leveraging, and start emptying out their storage units. Long live Craigslist!

Anonymous's picture

We have been in a "garage sale economy" all year. I can't wait till consumers get serious about de-leveraging, and start emptying out their storage units. Long live Craigslist!

glenlloyd's picture

as a friend aptly said about the biz I work for and the problems we face, "your boss must be clueless...the place hit an iceberg, and they're still strolling the deck enjoying the pretty sky."