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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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Fri, 08/28/2009 - 13:04 | Link to Comment JohnKing
JohnKing's picture

psycho-bankers rule.

Fri, 08/28/2009 - 13:40 | Link to Comment ewmayer
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?

Fri, 08/28/2009 - 13:45 | Link to Comment Anonymous
Sat, 11/06/2010 - 18:22 | Link to Comment sohbetme
sohbetme's picture

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

Fri, 08/28/2009 - 13:06 | Link to Comment Daedal
Daedal's picture

Unfortunately, people are easily deceived by nominal values.

Fri, 08/28/2009 - 15:03 | Link to Comment VegasBD
VegasBD's picture

Unfortunatelty, its probably 99.9% of people

Fri, 08/28/2009 - 13:08 | Link to Comment D.O.D.
D.O.D.'s picture

My Nigga!

Fri, 08/28/2009 - 13:13 | Link to Comment deadhead
deadhead's picture

Thank you TD....very enlightening analysis.

Fri, 08/28/2009 - 13:15 | Link to Comment Joe Sixpack
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?

Fri, 08/28/2009 - 13:33 | Link to Comment I need more cowbell
I need more cowbell's picture

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

Fri, 08/28/2009 - 15:06 | Link to Comment darkness (not verified)
Fri, 08/28/2009 - 13:17 | Link to Comment deadhead
deadhead's picture

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

Fri, 08/28/2009 - 13:17 | Link to Comment Bam_Man
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.

Fri, 08/28/2009 - 13:46 | Link to Comment ptoemmes
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.

Pete

Fri, 08/28/2009 - 14:25 | Link to Comment Steak
Steak's picture

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

Fri, 08/28/2009 - 14:32 | Link to Comment Deficient Market
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.

Fri, 08/28/2009 - 13:19 | Link to Comment Stevm30
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.

Fri, 08/28/2009 - 13:31 | Link to Comment I need more cowbell
I need more cowbell's picture

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

Fri, 08/28/2009 - 18:41 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:25 | Link to Comment Mediocritas
Mediocritas's picture

Shuffling deck chairs on the Titanic.

No amount of bucket bailing will refloat this thing.

Fri, 08/28/2009 - 13:31 | Link to Comment Shell Game
Shell Game's picture

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

Fri, 08/28/2009 - 14:26 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:22 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:29 | Link to Comment Anonymous
Fri, 08/28/2009 - 14:11 | Link to Comment Jim_Rockford
Jim_Rockford's picture

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

Fri, 08/28/2009 - 14:20 | Link to Comment Anonymous
Fri, 08/28/2009 - 18:45 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:29 | Link to Comment andrew123
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.

Fri, 08/28/2009 - 13:36 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:43 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:49 | Link to Comment curbyourrisk
curbyourrisk's picture

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

Fri, 08/28/2009 - 14:21 | Link to Comment Jim_Rockford
Jim_Rockford's picture

and add "Garbage, its got electrolytes!"

Fri, 08/28/2009 - 14:56 | Link to Comment andrew123
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.

Fri, 08/28/2009 - 18:24 | Link to Comment Uros Slokar
Uros Slokar's picture

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

Fri, 08/28/2009 - 18:43 | Link to Comment Cheeky Bastard
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.

Fri, 08/28/2009 - 20:17 | Link to Comment Anonymous
Sat, 08/29/2009 - 00:49 | Link to Comment Anonymous
Sat, 08/29/2009 - 09:32 | Link to Comment jm
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.

Fri, 08/28/2009 - 13:37 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:40 | Link to Comment phaesed
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

Fri, 08/28/2009 - 13:41 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:41 | Link to Comment rD2.0
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

Fri, 08/28/2009 - 15:40 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:42 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:44 | Link to Comment Jeanbon
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.

 

 

Fri, 08/28/2009 - 13:43 | Link to Comment tradertim
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.

Fri, 08/28/2009 - 13:51 | Link to Comment Jeanbon
Jeanbon's picture

I would call that "Project Canadian Bacon"

http://ecx.images-amazon.com/images/I/51RPYB3PERL._SL500_AA240_.jpg

Fri, 08/28/2009 - 14:05 | Link to Comment Anonymous
Fri, 08/28/2009 - 14:07 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:50 | Link to Comment glenlloyd
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."

Fri, 08/28/2009 - 18:50 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:50 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

boobs?

Fri, 08/28/2009 - 13:54 | Link to Comment jbulog
jbulog's picture

This whole arguement about real returns and nominal is one better left for the economists. In reality if I bought a bunch of stocks in March 09, which are now on average 50% higher, in real terms I am better off, in fact a lot richer.  This long term vs. the market view only applies to people who trade the index's, and Tyler to be fair that should have been stated in your article. That is a very narrow view of things not the other side to the story.

Fri, 08/28/2009 - 14:07 | Link to Comment Jeanbon
Jeanbon's picture

True, we could close down all factories

in the US and go to work for GS. In fact

we do not have to produce, we just have

to print money and speculate on the financial

markets. The FED gives everybody money

to speculate, not only to GS and friends,

no everybody stop working now and ask

for some money from the FED to speculate.

We could pump up the S&P500 to 3000, and

than the FED prints more money and makes

a buyback of all speculative papers and stocks.

For the little people the FED could launch

a quadruple ultra S&P500 ETF, so they

would be leveraged and get higher returns.

Fri, 08/28/2009 - 14:26 | Link to Comment Anonymous
Fri, 08/28/2009 - 18:57 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:56 | Link to Comment Anonymous
Fri, 08/28/2009 - 13:58 | Link to Comment Anonymous
Fri, 08/28/2009 - 14:03 | Link to Comment Anonymous
Fri, 08/28/2009 - 15:06 | Link to Comment darkness (not verified)
Fri, 08/28/2009 - 14:17 | Link to Comment max2205
max2205's picture

TD, call GS. on this.  We need an ETF that tracks this!!

Fri, 08/28/2009 - 14:23 | Link to Comment Anonymous
Fri, 08/28/2009 - 15:13 | Link to Comment Rollerball
Rollerball's picture

Big Ben will be a martyr for the Keynesian cause.    

Fri, 08/28/2009 - 16:54 | Link to Comment Sancho Ponzi
Sancho Ponzi's picture

Ben is actually a Republican and Friedmanite. The problem is that nobody can or will stand up to High Finance, and until that happens, the Fed is stuck laundering mortgage backed securities and other toxic paper to try and make the big banks and financials whole again.

Bobby Kennedy tried to fight the Mob and look what happened to him. These banksters are every bit as dangerous.

 

 

Fri, 08/28/2009 - 19:00 | Link to Comment Anonymous
Fri, 08/28/2009 - 23:14 | Link to Comment Anonymous
Fri, 08/28/2009 - 14:38 | Link to Comment Anonymous
Fri, 08/28/2009 - 15:13 | Link to Comment walküre
walküre's picture

Typically September is a down month with average 2.5% drop in all major indexes. October is typically a "crash month". July being a stronger month.

Markets are technically overbought and manipulation is apparent.

Nobody can tell me that investors are not increasingly nervous about the prospect of a typical September stock rut in conjunction with the "irrational exuberance" we are witnessing.

If markets keep going up in September and October you should withdraw your money from all money market and bank accounts, buy as much gold as you possibly can and start to hunker down.

What if... there is not enough liquidity to payout all investors who try to cash in their shares when a sell off happens?

Run for the hills, guys.

Fri, 08/28/2009 - 15:13 | Link to Comment Anonymous
Fri, 08/28/2009 - 15:51 | Link to Comment Gilgamesh
Gilgamesh's picture

Gold not following the EUR/USD correlation (or inverse DXY) anymore.  It's only a short-term divergence, but there are run-ups in select hedgie holdings that are M&A targets...

 

Still can't crack the 960 upper trading range.

Sat, 08/29/2009 - 10:24 | Link to Comment Anonymous
Sun, 08/30/2009 - 01:31 | Link to Comment Anonymous
Sun, 08/30/2009 - 04:18 | Link to Comment michigan independant
michigan independant's picture

Sadly this is true. The Senate says it is looking for a pivot point to turn it around. Not ever going to happen to corupt. Think back about balance sheet depression and how long that lasted in public thinking. We where warned that price mechanism's where wrong and debt mining has the Fed spreading the disease even more in many segments to malinvestment. There just rebuilding the debt bomb to get the rest of you, but deflation just may beat them to it. We are dismissing more employees in October. I have worked Corporate for over 3 decades. Seek value? Given the current sitution of Social Darwinism and LEAN manufacturing principles you guys are on your own. I have been looking for orientation in the market with tech and fundamental tools. In support with the copious data provided here the point never left my mind that it is never about you. Given the strip mining debt industry and reflation tools from the children in charge I may look in the spring now for value. Wave this wave that, thousands are still looking for and thousands continue to be dismissed. Point blank the lepers and children upstairs have no value inclinations with you in mind and have done what the left needed done namely crisis. You are in a fight for your lives now, and until the debt retires and the workers are returned to value orientated affairs the disconnects will continue. Indeed a debased people are fruit of a debased currency and this last march to the Keynesian's paradise will utterly destroy you and he listedthe gradualism process it entails in his treatise. Socialism works until there is no more able to produce, and the left will not ever learn to think or provide value. When deflation crushes all it should then you can rebuild since you have no choice. They will tax you from a barrel of the gun more very soon since ALL Government's in crisis do to there survival and there direct interests only. To date look around in your community unless your eyes deceive. Many will point to direction on how they can save us. They lie until you see production to build and trade in abundance with the free market. Countless times i read where the trade representatives conveyed many where seeking to maintain loopholes to current arrangements. It have never been about the road to serfdom since it it here in my opinion just as the Keynesian's promised. Enjoy your Democracy as they increase and you decrease. Yes we know as Churchill noted and I paraphrase "when all other means are fail the Americans will do the right thing. We shall see since it is all about tiny bubbles now as I was talking to older money than me. Good luck all and never give up.

AMOS 8:11   

 

Sun, 08/30/2009 - 13:13 | Link to Comment Anonymous
Mon, 08/31/2009 - 14:40 | Link to Comment Anonymous
Thu, 09/10/2009 - 23:06 | Link to Comment Anonymous
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cheap uggs for sale's picture

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healthelectron's picture

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