Some Cold Water In The Face Of A Manic-Depressive Market That Has Overdosed On Lithium

Tyler Durden's picture

In an amusing turn demonstrating just how manic-depressive the market has become, stocks have gone from fearing an all out onslaught in Europe, to complete euphoria, based on a favorable ADP payroll number (which in the past several months had been broadly ignored due to its consensus misses). What is even more stunning is how the two main rumors that forced the market to surge: that Trichet was commencing a debt monetization program (refuted) and that the IMF would increase its funding contributions to Europe (mysteriously leaked by a "source" in the administration to Reuters, then also promptly refuted but only after it had already raised stocks another 50 bps) ended up being false. In the meantime we got an initial claims number that was weaker than expected, and an ISM that missed consensus, and a pending home sales that was so low it could only go higher, and which will likely result in half of the transactions falling due to the spike in mortgage rates. But hey: at least Goldman managed to boost the value of the stock portion of its bonuses, after the firm upgraded the economy, but more importantly, all banks, itself most certainly included.

It is yesterday's ISM that we wanted to focus on. Much as we hate to rain on the parade, we (unlike Princeton educated Ph.D. economists) continue to firmly believe that the market does not make the economy, especially when even your cab driver knows it is all a ponzi scheme (or, rather, it's a buy the dip scheme). As John Lohman, and David Rosenberg subsequently, remind us, the spread between the inventory and the new orders components of the manufacturing ISM came at a spread unseen in over 30 years, and a phenomenon which without fail leads to at least a sub 50 print in the ISM, if not outright (re)recession.

Here is how Rosenberg described this variance:

The U.S. ISM manufacturing index that came out yesterday, it actually came in below expected (bucking the regional indicators and dipping to 56.6 from 56.9). And with the sag in orders and pickup in inventories, the components were less than impressive. As today’s LEX column points out in the FT, when ISM orders slip below the inventory sub-index, “this usually indicates an oncoming recession...a return to sub-50 ISM readings cannot be ruled out...there is still the possibility that the V turns into the first half of a W.”

Hey, don’t shoot the messenger (even if we concur)!

That goes double for us. The magic of inventories is that just like China, one can accumulate all the goods needed (on cheap credit) but at some point these have to be sold. Just ask GM, which has now stuffed enough cars at its dealers that it won't be able to unclog channels for quarters (buy hey, the IPO is a resounding propaganda success). The main growth driver of the economy, and more importantly, of that new global economic dynamo - China, is and continues to be inventory accumulation. So when orders plunge and inventories surge, no matter how hard one spins it, it is impossible to reach a different conclusion that something will snap eventually. How long before it does? It all depends on credit procurement. If Bernanke keeps real rates negative, it is possible that on the first chart below, the Inventory-Order differential (red line) may hit all time lows in a few months, even as the ISM hits all time highs. And we have no doubts that the spinsters on a ratings-challenged CNBC will spend no time to present the data as positive. We once again will beg to differ. But in the global game of extend and pretend, where as we speculated earlier, even a modest downdraft in stocks now has the potential to bring down entire banks due to the pledging of equity securities with various central banks (definitely at the Fed, and most certainly in Europe), it is the Fed's only job now to keep the S&P hyperinflated.

Below is the chart of the ISM and its orders less inventories component:

And the same chart showing just how far the differential has dropped: there are only a few times in history when the 3MMA has dropped below zero. Each and every one of those times was accompanied by an ISM sub-50 contraction.

So please pardon us while we remain completely unconvinced that like the amusing cartoon yesterday made all to clear, the only thing this market is chasing is its tail. As market historians know all too well, in the period between 1930 and 1939, and during the Japanese two lost decades, stocks had so many 50%+ headfakes it is difficult to count. And never before was the entire world on the verge of global bankruptcy, when the only recourse was to devalue currencies with impunity, leaving increasingly more to create their own gold standard by purchasing ever more physical gold. So those who wish to chase this ponzi higher, are welcome to do so: it is only fitting that the previous post talks about Barney Madoff. We wonder how many of the people invested with Madoff would have pulled their money the day, month, year or decade before the ponzi was discovered had they known they would all lose everything. But such is human psychology: chasing momentum and inflection points, in a broken market, supervised by corrupt regulators, and ultimately determined by central bankers however, is not for us.

We can only wish the best of luck to those who do enjoy tossing live grenades.


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Atomizer's picture

History repeats.

Free To Choose: The Tyranny of Control

Government planning and detailed control of economic activity lessens productive innovation, and consumer choice. Good, better, best, are replaced by "approved" or "authorized." Friedman shows how "established" industries or methods, seek government protection or subsidization in their attempts to stop or limit product improvements which they don't control. Friedman visits India, Japan and U.S.

Watch both videos.

Rainman's picture

Tossing live grenades is fun. Catching a whole nother matter.

razorthin's picture

Not surprising really.  It is the tug of war between reality and pumpitude that keeps us in this trading range.  It's been pretty easy to trade as long as you expect neither a breakout nor breakdown.

ghostfaceinvestah's picture

The single most important chart for the stock market is the growth of the Fed's balance sheet. Since March of 09 there is a near perfect correlation between the two (and the price of gold, for that matter).

In April of this year the Fed's balance sheet not only stopped growing, it started shrinking, as MBS paid off.  And of course that sucked money out of the stock market which caused the selloff.

As long as the Fed balance sheet keeps growing, the stock market will continue to rise.

Of course, what happens once the balance sheet stops growing?  Timber.

Bob Sponge's picture

I have to wonder about timing this week. Maybe the market has been pumped like crazy to divert attention from the Fed bailout data released this week. You can't be happy and mad at the same time, so maybe they are hoping people are happy about the market going up instead of being pissed at the Fed for bailing out foreign banks.

tsx500's picture

no, that was just a huge coincidence that the huge rally and fed bailout data came at the same time .......

rocker's picture

Don't forget, it's the jolly happy season too.  Just buy something for Christmas.  How about stocks. Buy the Fukn Dip. LOL

Spalding_Smailes's picture

Truck tonnage rose to 0.8% in October according to the American Trucking Association.  September’s reading was also revised up to 1.8% (via ATA):

American Trucking Association Chief Economist Bob Costello -

“October tonnage levels were at the highest level in three months, even after accounting for typical seasonal shipping patterns. These gains fit with reports out of both the manufacturing and retail sectors and show there is a little bit of life in this economic recovery.PragmaticCapitalism


WASHINGTON, D.C. – Dec. 2, 2010 – The Association of American Railroads (AAR) today reported for the week ending Nov. 27, 2010, U.S. freight railroads maintained traffic gains of 3.2 percent over the same week last year, originating 254,121 carloads. The comparison week from 2009 included the Thanksgiving Holiday. Intermodal traffic for the week totaled 183,790 trailers and containers, up 10.8 percent compared with the same week in 2009, with container volume up 11.7 percent and trailer volume up 6.1 percent.

Clockwork Orange's picture

Rosey is no match for Ben. 

And, old rules no longer apply.

When the Fed supplants Japan as the #2 buyer of Treasuries, an entirely new ball game is underway.

TheGreatPonzi's picture

Participating in this market, even in the form of shorts or calls, is somewhat bringing liquidity to the Ponzi.

The governement sponsored-Ponzi can last an eternity, and the only thing you will gain trading this market or waiting for the collapse is your nerves broken.

Central banks and governments can make miracles when they refuse to let the reality win. Bailout to bailout, QE to QE, they can save a ridiculously fragile economy, facing total collapse each time the ECB or the FED does not announce exceptional measures, which they will announce, because they wake up each day terrified.

Dump your dollars, stop trading, buy gold and ammo, stop worrying and wait for the collapse, which can be postponed for a very long time, but will come after all in five years max.

TheGreatPonzi's picture

Can you emphasize your answer, please?

It has already lasted 3 years and 4 months since the economy faced total collapse in the absence of governmental action, it can certainly last a few years more. Sorry to say that, but you have to be realistic.

jm's picture

"Dump your dollars"... reasonable enough.

"Stop trading"... hell to the no.

"Buy ammo"... seen enough of that crap in my lifetime already.

"Wait for the collapse which will come after all in five years max"... or not.


Implicit simplicit's picture

Now we have 12/7 and 12/15 dates to watch.

12/7- bank withdrawals and wick BAC leak

12/15- tax cuts extension or not decision

Should prove interesting.

billhilly's picture

Hell, with all the insider selling going on I think folks are already preparing for the Cap-gains tax increase.

prophet's picture

Definitely one for the math department but the gist of it is something like what follows.

Invested 100, now worth 160.  At 15% rate I pay 9 in taxes, net 51.  At 20% rate I pay 12 in taxes, net 48.

Juice my 160 to 163.75 (a 2.34% gain (oh yea that gone done in the last two days didn't it)) and I pay 12.75 in taxes, net 51.

Not a factor for the informed investor, just a tool for the industry to try and move money. 

Dollar Bill Hiccup's picture

ISM I-S-shmem ...

Liquidity is sloshing around in the bowl. Notions of cause and effect can become traps at this point. The market is self reflexive and the economy is self reflexive because people are self reflexive and self referential.

All of this liquidity can certainly kick start a real economy. Lurching too and fro is the by product of liquidity which is compressing time frames. Money is available instantaneously, so decisions of risk on risk off need to be made instantaneously in order to keep up with the money ...

no cnbc cretin's picture

The U.S. ISM manufacturing index that came out yesterday, it actually came in below expected (bucking the regional indicators and dipping to 56.6 from 56.9). WTF, what isn't I don't get? I know we're in a depresson, soon to get worst, but why 56.6 vs 56.9 such a big deal? I would have thought 30 vs 56.9 would be huge. Not just .3 - and if just that small amount is huge deal, we're screwed, how stupid is that?

erik's picture

Does the same hold true for ISM Services?

goldmiddelfinger's picture

This lines up with all the optimistic CEOs and PMs CNBC and Bloomberg parade on plus 250 and plus 100 days. They are putting inventory build on steroids with a specious bet that consumers will be back cards in hand.

max2205's picture

TD it's too late dude, the vortex is about to hit terminal velocity. Everything will be suck in and spit out at much higher altitude (price).

Time to let go of the pole and wear a parachute so our fall will not hurt too much.

greenewave's picture

The Worst of the Financial Crisis Finally Over!!, watch this video "DICK Bove –“Worst of Financial Crisis Finally Over and Sarah Palin Reality TV!!" at (

by Anonymous

HAha awesome video gives me hope that some people in this? country have their heads on their shoulder. People are really losing it.

VisualCSharp's picture

Just curious. Why are you always posting URLs to and not directly to Are you getting AdSense revenue from having links exposed on ZeroHedge? I'll continue to junk your posts as long as they have this stink.

VisualCSharp's picture

Ah, I see. is Google's URL shortener for

Even still, your posts strike me as nothing but simple advertisements. And what's with the "by Anonymous" followed by a reply pretending as if you have no interest in "GreeneWave?"

HedgeFundManager's picture

The bullishness is making me puke. Listening to all these hedge fund clowns talking about stocks being cheap to bonds. What a scam.

TheGreatPonzi's picture

These hedge fund clowns actually want to make money, not to provide profitable and moral investment advice to the sheeple. They don't care about making wrong forecasts.

They will recommend you to buy on CNBC, saying the economy is improving and all the shit, while accumulating a big short position behind the scenes.

Nobody will ever confront them.

SheepDog-One's picture

Yea bullish over what....the conclusion Ben will now pump the markets as the 'new normal' is flawless, or can even work for a short time in the face of obviously horrible economic reality?

Sokhmate's picture

Lithium cures all. Arsenic,once we run out.

Dollar Bill Hiccup's picture

Interesting piece in WSJ about bacteria that use ARSENIC as a foundation for their DNA ...

If bacteria can do it, maybe bankers can too ...

goldmiddelfinger's picture

You could post some charts of transport names here.

CSX and CHRW-just to name 2 starting with "c"

Caviar Emptor's picture

The economy, aka the paper pyramid, must suck at the teat of the Fed for any growth. That is one clear consequence of the crisis and the response. The US economy has definitively crossed the line out of capitalism and closer to the state run enterprise model of China. To lever up, Wall Street will be looking East to banks and investors interested in becoming the new partners in crime. Anyone looking for sleaze will find it. We're now fully committed to this course because growth in the real economy can never match the needed levels of gains to compensate for the amount of paper and debt incurred. Paper will back paper. Until it doesn't. 

TheGreatPonzi's picture

China? Actually, when you look at the corporate and income tax rates, there is less statism in China now than in the USA now.

Jim Billy Bob James IV's picture

Every action results in a reaction -

Budd Fox's picture

Tossing live grenades in Central Bankers' underwear! THAT is the ultimate fun

Budd Fox's picture

Sorry, fat impatient finger.

gloomboomdoom's picture



Hey, Bucky. "Here is a 60 inch plasma, for $500 dollars"

It is gonna bust folks. China. Collapse of price structure. Reboot. BAM new currency.




trav7777's picture

Whatever you say, Gen.

Sure, prices will fall below the energy cost of production...right; and the notes of a bankrupt state will become more worthful

Cui Bono's picture

Been watching a documentary on ABC about a family owned manufacturing concern that has run afoul of local law so they shut the factory down.... Very disturbing... I hope it has a happy ending......

BTW- One guy actually said "Release the Kringle"

Paul Thomason's picture

Excuse me for 4. questions that might be naive, but I just can't work out what is happening any more and hope some wiser people than me can help me undertsand;

1. Is market manipulation illegal?.

2. Is what the Fed doing manipulation?. 

3. If the Fed says it is deliberately manipulating asset prices then if the answer to  question's 1. & 2. is yes, then I don't get it - isn't what they are doing illegal?.

4. My last question is, why is that when banks get caught committing fraud etc that they make a 'settlement' with the SEC?.  How come they can pay a fine and there is no criminal charges?, - clearly there is a counterparty that has been wronged and the law has been broken?.  Isn't a settlement just like a bribe?.

Sorry for these silly questions and this may be the wrong place but I just can't make any sense of what is going on?. 


Thank you in advance.


TheGreatPonzi's picture

I don't have the pretention to be wiser, but I think I can answer these questions.

"1. Is market manipulation illegal?."

Yes. This is not in the FED mandate.

"2. Is what the Fed doing manipulation?. "


"3. If the Fed says it is deliberately manipulating asset prices then if the answer to  question's 1. & 2. is yes, then I don't get it - isn't what they are doing illegal?."

Because instead of manipulating the market itself, the FED uses intermediaries and shell companies. Then it becomes legal, but not more moral.

"4. My last question is, why is that when banks get caught committing fraud etc that they make a 'settlement' with the SEC?.  How come they can pay a fine and there is no criminal charges?, - clearly there is a counterparty that has been wronged and the law has been broken?.  Isn't a settlement just like a bribe?."

Because banks own the political and judicial system. You'll note that indeed, only banks can escape courts by a settlement.

Rogerwilco's picture

I remember the last months of 1999 going in to 2000, and this all feels eerily similar. Different players and focus in that bubble, but the same BS from the talking heads and background pumping by the Fed. The markets were surging and all that mattered was momentum. We were in a "new" era where jobs were obsolete and stores would be open 24/7 to handle the flow of commerce. Hell, we even had a Home Depot that actually changed its hours to match Wally World. A few voices warned that the tech craze was likely overdone, but they were dismissed as out of touch with the new reality. Good ol' Alan Greenspan, scared of Y2K, had just dumped over $1T of liquidity into the system and that was like pouring gasoline on a campfire.

It was great until one day in March when it wasn't.

QuantTrader's picture

Give it a rest.  The double dippers got it wrong.  Time to celebrate this market is ripping and the economy will soon follow (wealth effect + obama capitulating on taxes = jobs).  To add the ISM "missed" to your litany of issues is absurd.  It was off by 2 tenths of a % but at a level associated with 5% GDP growth historically.

You can harp on for the sake of the readership but I'll take the 20 G's my PA was up today.

No Mas's picture


Rosie is articulate and convincing, but he is wrong.  If we see a sub 50 print within the next five years, I will cease to post on this board.

But just like a $10 loaf of bread (as called here on 11/4/2010), it ain't gonna' happen.

SheepDog-One's picture

SURE you guys! All IS well! As long as 0% interest rates is the new nirmal forever, and Ben can continue monetizing $30 billion weekly pumping markets, beside the extra $9 trillion to banks under the table! Yea its all good! As long as a total fantasy world can be continued indefinitely!

Rogerwilco's picture


Optimism is good, so tell us an optimistic story. Explain how the Fed unwinds its balance sheet and how interest rates go back to levels "associated with 5% GDP growth", without blowing the whole goddamned banking system to pieces.

Spalding_Smailes's picture

..."The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.

Central bank officials are discussing plans to use so-called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That's where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

There's no sense that policy makers intend to withdraw funds anytime soon, said the people. The central bank's challenge is to decrease the cash without stunting the economy's recovery and before it sparks inflation. Fed Chairman Ben S. Bernanke said in a July Wall Street Journal opinion article that reverse repos are one tool to accomplish that goal without raising interest rates.

"One thing the Fed has to figure out is if they can launch pilot programs without spooking the market and creating the perception that they are about to tighten," said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance. "They are discussing things like accounting issues, and updating the governing documents to the volume of reverse repos the dealer community could absorb."...Bloomberg ~

Spalding_Smailes's picture


Uncle Ben ~


....." the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions. Reverse repurchase agreements involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date."....