Why the Fed Cannot "Exit" Successfully... Without a Market Crash

Phoenix Capital Research's picture


Bernanke claims the Fed can successfully exit its current strategy. He’s lying. Or he’s adhering too strongly to economics and ignoring human nature.


One of the easiest trades for financial institutions over the last four years has been to simply front-run the Fed during its QE programs.


After all, the Fed was literally broadcasting its intentions to the markets. So traders did what they do best and took advantage of this.


In this context, the second rumors begin that the Fed would taper its bond buying you should see bonds collapse as traders realize the game is up.


And if the Fed actually did taper or begin to implement a strategy that even resembled taking its foot off the gas… or God forbid exit, then we’d see a very rapid adjustment to reveal the “real” risk in the system and the “real” level at which rates should be.


Take a look at what happened to the 10-Year Treasury when rumors of “tapering” appeared:




The Fed cannot exit. It will claim that it can, but market reactions to any real exit will be disastrous. We’ve passed the point of no return. Bernanke’s best home is to retire before the music stops.


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Best Regards

Graham Summers


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Mi Naem's picture

The point of the article is certainly correct. 

At least we didn't have to go the the blog for a free subscription to read the details in a Part II.  Thanks for that. 



logicalman's picture

The world's disease mainly comes down to Fiat, Interest and Central banks.

Everything else is just symptoms.


StarTedStackin''s picture

The FED exit will be timed ahead of the 2014 elections, so the Obowel Movement can blame the following crash on the Republicans in the House.

therover's picture

We are approaching stall speed.

mt paul's picture

push the stick forward...

hope you get fast

before you get low...


andrewp111's picture

This is why The Bernank will not get a third term.

falak pema's picture

ask DSK; when he was questioned by an investigative female reporter of a serious journal why he had let his primal urges run away with his better senses to destroy his brilliant political carreer in the making, he replied:

"well, I've paid for it,  i'm paying for it now, I will continue to pay for it for the rest of my life; so why don't you give me your telephone number?"

Its called hubris and consequences. Fed is celebrating its 100th anniversary of hubris this year. 

flow5's picture

NO, the roc in MVt went up in May.  It falls in June.  Then  up until July.  Then down until Oct. 

d edwards's picture

Or-if the fed and other global banksters lose control and the whole freaking thing collapses!


Setarcos's picture

Graham is stating the bleedin' obvious, but I gave him a "great" for maybe enlightening those who still cannot see.

RaceToTheBottom's picture


He cannot even tapper by a few dollars without WS calling his bluff.

I think the Bernank is now saying that the FED should have a larger balance sheet and he can still just let it sit.  But I don't think that will work either.

flacorps's picture

Bernanke told me cold turkey starts Monday.

FeralSerf's picture

Should I put in my order now for white meat on sourdough?

StarTedStackin''s picture

File this under NO SHIT SHERLOCK........but the analysis is spot on.......




Long WV Farmland.......

Setarcos's picture

Sure it is "no shit Sherlock", but indeed the analysis is spot on and many people have yet to become aware of even the basics that Graham is rather good at explaining sometimes.

Platinum's picture

When/If the QE ends, the 10 year Treasury chart (along with pretty much all other charts) will look like the Richter Scale reading for the 1906 Earthquake. It's going to be an interesting ride.

andrewp111's picture

Caution: When QE1 and QE2 ended, the 10y Treasury interest rate actually went down. But volatility and instability is likely to go up. Way up.

StarTedStackin''s picture

QE will end with the end of irrationality.

Meremortal's picture

Taper hysteria is as silly as Y2K and fiscal cliff hysteria.

Yes, Bernanke can taper. And he will as he will have no choice.

You don't think he can go from 85 billion a month to 83 billion without causing a crash? Of course he can.

That's a taper.

Of course, religion doesn't require evidence, just faith.

There's always another crash somewhere in the future, but the next one won't be caused by Bernanke's tapering.

Besides, why talk about a crash as if it's a bad thing? Crashes are necessary, that's why they happen!!!

Setarcos's picture


"Besides, why talk about a crash as if it's a bad thing? Crashes are necessary, that's why they happen!!!"

You might as well say, "Besides, why talk about war as if it's a bad thing?  Wars are necessary, that's why they happen!!!"

NO I am not being capricious, because wars, violent revolutions and general social turmoil have always been part of economic crashes.

Even when war does not immediately result from an economic crash, such as the Great Depression during the 1930s, millions of people suffer ... but YOU write them off as necessary collateral damage in the centuries-long battle by banksters to take over the world.

Pleased to meet you Meremortal, glad to know your name ... but I dare you to listen to the Stones "Sympathy for the Devil".


I seldom wish anyone any harm, but I find myself hoping that, when the big crash comes, you will find yourself homeless and regretting having wished that on others ... or maybe you are in the top 1% and immune, though if you were you would not be commenting in ZH.

Meremortal's picture

"I seldom wish anyone any harm, but I find myself hoping that, when the big crash comes, you will find yourself homeless and regretting having wished that on others ... or maybe you are in the top 1% and immune, though if you were you would not be commenting in ZH."

I don't wish for a crash. There are many around here who do, daily. History shows that crashes and booms happen. I think we are already in the "crash" and have been for some time. I expect things to get better around 2022-2025.

I don't deal in wishes, I prepare for possible outcomes. 

Your ugly wishes for me notwithstanding, I am well prepared for whatever comes. That's my job, personal responsibility.

I hope you and everyone survives what is coming. Negative wishes are a waste of time, so I don't bother with that.


bunnyswanson's picture

Bubbles are ponzi schemes; supply and demand economies react efficiently enough that there is time to prepare to exit an investment and move it to a more lucrative one, without losing your shirt.


Main Entry: robbery Part of Speech: noun Definition: stealing Synonyms: break-in, burglary, caper, embezzlement , felony, heist, hit, holdup, job, larceny, looting, mortal sin, mugging, purse-snatching, stickup, theft, thievery, unlawful act, wrongdoing Notes:

burglary can take place when the victim is not there and is the theft of property without the owner being aware of the crime; in robbery , the victim is present and is confronted.


Imminent Crucible's picture

"You don't think he can go from 85 billion a month to 83 billion without causing a crash?"

I'm afraid people don't understand the nature of a debt-backed system. It's worse than you think. It's even worse than I think. Here's the fundamental issue: In a credit-driven economy that runs on a debt-backed currency, the debt must continue to grow. Not only that, it must continue to grow at an increasing rate or the economy goes stagnant. As it is, we have a stagnant economy because--believe it or not--Bernanke is unwilling or unable to increase system debt fast enough to get the economy to what they call "escape velocity".

In this system, all money comes into being as debt, and debt is money. If debt does not increase, deflation ensues. So in a sense, the cretinous Paul Kroooogman is correct: to get the economy going faster, Bernanke must expand the money base much faster. He must create new credit faster than it is destroying itself on bank balance sheets, and get the banks lending again. The banks don't want to lend right now, and no sane person wants to borrow.

When the banks begin lending again, the velocity of money will increase, and all the trillions in new credit that are currently constipated in the bowels of the Fed's reserve accounts will go out seeking better yields than the Fed pays. As soon as that happens, people will suddenly change their minds about the scarcity of money and start throwing it out the window like they did in 1978-1979. The difference will be that, instead of the scant $1 trillion in M2 money stock that whirled around in 1978, we have $11 trillion in M2 on hand today plus far more in other credit aggregates PLUS the even larger sums in the shadow banking system, which the BIS estimates at several hundred trillion in US banks alone.

Bernanke has cooked up a real Hobson's choice here: He can taper, and watch the mask slip off this ongoing Depression. Or he can keep on easing, and watch the currency destroy itself. Either way, we are in for crashes at every tier of the economy and markets.  Gold money was not a panacea, but it was better than this.

Now I need a beer.

HalinCA's picture

Certainly Ben knows this.  My question is why hasn't the FED or Congress done anything to force banks to loan out the money they have already?  On ZH we have seen ideas on just this point.  So the fact that now after what, 3 years of QE, they still have not taken the steps needed to get the money into circulation tells me their real objective is not to 'fix' the economy.  Their objective has to be to crash the dollar.

Or maybe they rally are brain dead.  


Whatever ... 


FeralSerf's picture

Crashing the dollar is the easiest, perhaps the only at this point, way to transfer the accumulated savings of the western middle class (primarily their pensions now) and the Chinese to the western Elites.

Bernanke works for the western Elites (duh).

yellowsub's picture

Banks were faulted for not having any lending requirements.  When they went back to enforcing them, the FEDs and gov't said they weren't loaning enough.   Now you're back with the same scenario again with almost anyone receiving loans.

Meremortal's picture

Well my friend, if you are correct (and you are very close), all this discussion doesn't matter. And it doesn't matter what Bernanke does, despite all the screaming.

You are correct that there is no easy way out. It is the nature of a "crash" that is overblown here.

People act like a crash is the end of the world. A crash is simply the necessary cleansing that leads to the next boom. 

People here love to talk about the hyperinflation in Germany. About 15 years after that hyperinflationary "crash", Germany was strong enough to take over most of Europe, and if not for the USA, Germany would have ruled the world, or whatever parts of it Germany desired. That's quite a turnaround! Think what Germany could have accomplished if it had not fallen under Hitler's spell and wasted all those resources on a lost World War.

And even after losing 2 World Wars in about 27 years, look at how Germany has done since.

Booms and crashes come and go. And through it all some people make money, and the rest make excuses.

When you think that everything is someone else's fault, you will suffer a lot.

When you realize that everything springs only from you, you will start to live well. 


Imminent Crucible's picture

"Booms and crashes come and go."

That's true, but it falls short of illuminating the problem. Stop a moment and ask the question, "Why do we keep having boom followed by bust followed by boom, bust, etc?"

The boom>bust phenomenon, known to classical economists as the "business cycle" only exists in a credit-based economy.  The crashes you refer to are the natural follow-on consequence of the boom. But why do we have the boom to begin with? This type of boom can only take place with a central bank expanding credit at a rate well beyond the growth of population and the economy. They boost the money supply through easy credit, new "money" gushes into the economy through the fractional reserve multiplier "machine", and prices rise. The Fedsters point to the ensuing "prosperity" of foolish people buying Hummers on credit and $800,000 condos, and they say, "Look how good things are! The economy's doing great! We're geniuses!"  or as former Dallas Fed President Bob McTeer put it, "Go out and buy an SUV!" Malicious idiot.  All the while, the boom is nothing more than demand pulled forward from the future by making it artificially cheap to borrow money.

In a cash economy, with no central bank to print money from thin air by the trillions, this kind of boom will not happen. There can be "baby booms", Florida swampland scams, various Ponzi swindles, but no generalized boom across all sectors of the economy and all asset classes.  If the Fed will not print money, the worst you can get is capital misallocations and Beanie Baby manias that blow up and burn the silly participants, who then hopefully learn their lesson.

In this type of Fed-induced credit bubble, no one ever learns the lesson. There are, right this minute in the Los Angeles area, dinky 600 sq ft houses built in the 1950's that are offered at around $600,000. And they're selling. Home prices are rising in Phoenix, Miami, Las Vegas, San Diego--all the places that went crazy with the Housing Disease less than 10 years ago. They're sober now, and ready for another big ruinous party.  None of this would be happening without the Fed and its ability to replace authentic savings with Money From Heaven (hell, actually).

Without the credit traficantes, the economy would have to grow more slowly, and that is a good thing. The growth would be sustainable, because it could occur only as quickly as real people could save real money and invest it in real, viable enterprises.  And since they had worked all their lives to save that money, they would be a LOT more careful about where they invested it.

andrewp111's picture

In the pre-Fed, (mostly) gold standard era, we had booms and busts. Only they were more frequent, and the cycle length was about 20 years. Now the cycle length is about 80 years, so the accumulated imbalances are much worse. Since imbalances accumulate exponentially, the magnitude of accumulated imbalance over 80 years should be the 20 year level to the 4th power.

The Wedge's picture

To sum it up you wrote:

A combination of Keynesian verbal celery, an overly simplistic and scary view of history, new age, self centered, Pollyanna hokum and an inappropriate sports metaphor.


Now, walk off that economic depression and give me 20 pushups just on principle.

Errol's picture

Mr/Ms Wedge,

Ummm, if I'm Pollyana why would I have to walk off a depression?  What sports metaphor (appropriate or not?).  And what the hell is Keynesian verbal celery?

You do have amusing ad hominem turns of phrase, how are you with factual rebuttal of my position?

The Wedge's picture

First, my response was not to you it was to Meremortal. But to enlighten I will explain. Celery offers no nutrients, nothing of value which describes Keynesian non-sense quite well.

"Booms and crashes come and go. And through it all some people make money, and the rest make excuses".

As for your post's on peak oil, I could offer some rebuttal but I generally agree with most of your comments. You seem to take Ken Defeyyes point of view that all that has happened (economically) since 2008 is heavily influenced by the "peak". I do not take the more apocalyptic point of view though.

Errol's picture

Meremortal wrote:

"People act like a crash is the end of the world. A crash is simply the necessary cleansing that leads to the next boom."

There will be no boom unless some new source of cheap energy is found.  US oil production peaked in 1971 and has been in a relentless downtrend ever since; despite economists's magical thinking, steeply rising prices since have not conjured up enough oil to reverse the downward trend.  The US coped with this by going into debt, hocking the real wealth that had been accumulated over 200 years of continuously increasing fossil fuel extraction.  Soon that stopgap measure will have run its course, and America will have to accept that the ability to create REAL wealth, based on REAL resources, has gone into reverse.  All else is wishful thinking.

Finalcialization, being imaginary, is the only part of the economy capable of continued expansion.  The folks in charge of this shitshow will continue to up the dose of financialization until they can't any more.  They have no other option.  None.

B2u's picture

but, but, but it is not what I learned in the classroom screams Bernanke....Why can people do things the way I want them too complains Helicopter Boy.

g'kar's picture

No matter what the FED does now, it all started to go downhill when they created the FED.




Lord Koos's picture

All that money printing -- it should have been spent on rebuilding the infrastructure in the USA.  If it had, we would have some real job creation and some growth.  But then then would be "socialism", which seems to be OK as long as it's for the banks.

theprofromdover's picture

The market will eat itself, it can't stop and be sensible.

Even on this website, how many times do you read commenters saying 'how can I profit in this market'


CHX's picture

Helicopter Ben, no soft landing site in sight. Enjoy the ride, while it lasts.

saveUSsavers's picture

Bernanke is a LYING ARSEWHOLE, so are many other Fed Governors. They are committing a legal crime by gutting an entire generation of savers thru inheritances to benefit financial speculators with access to free money.

And that Jackass Hillsewhore is in the same camp.

Non Passaran's picture

Sinclair has also been saying Europistan will be OK.
Maybe they can pull it off monetarily (if eurozone falls apart), but fiscally the place is an overtaxed shithole.

(This was meant in reply to Great Uncle below #comment-3661040)

lasvegaspersona's picture

In a dollar centric world the Euro zone is in trouble. Exit the dollar and we will see a different picture. We will have an ECB with 10,800 tons of gold back currency, no dollar debt and even Greece has assets as gold has a new higher value. 

All Europe needs to do is admit socialism failed, take care of those in trouble for a generation and let a new real capitalism flourish.

Errol's picture

Unfortunately, the economic growth of the last century was due to ever-growing extraction of fossil fuels.  Now that supplies of easy, cheap fossil fuels are running out (no, deep sea oil, shale oil, and tar sand oil are NOT available at $40/ barrel) and fusion didn't pan out, the economic system based on them is doomed.  There will be NO RECOVERY, not in your lifetime, not in your childrens' lifetime.  Ben B and crew are doing their best to reanimate a dying system, but unless they quickly find a source of cheap, easily scaled energy, the exponential growth system is finished.

Nobody wants to hear that, and so extend and pretend is the rule of the day.  Stop the extend and pretend and we're back in 2008 right quick.

andrewp111's picture

If the GubMint clowns wanted real solutions they would push hard to develop thorium nuclear energy. There is plenty of thorium available. But no, they won't do this because the greenie weenies and enviro wackos in their base won't allow it.

Errol's picture

I understand that the Chinese and Indian governments are doing their own independent research on thorium systems.  They have plenty of incentive to be less dependent on the US-controlled energy/economic system.  Let's assume that their research shows stellar results in 5 years...how much longer will it take to design and build a significant number of plants?  Is electricity a good one-for-one replacement for petroleum?  I'll bet a big build-out of thorium plants would require millions of tons of concrete; how many cement kilns in China and India are electrically powered?

I'm sorry, but it is really too late for any miraculous energy source that does not already have full-scale demonstration plants in operation at this time.  There will be no return to growth; BEST CASE is a continous, more-or-less controlled economic/industrial contraction for the rest of this century.  Plan accordingly.


Roger Knights's picture

"Ben B and crew are doing their best to reanimate a dying system, but unless they quickly find a source of cheap, easily scaled energy, the exponential growth system is finished."

Here's one candidate--Rossi's latest cold fusion gadget, the E-Cat HT2, which can run hot enough to generate super-heated steam. It's a deus ex machina, maybe:

Indication of anomalous heat energy production in a reactor device Giuseppe Levi, Evelyn Foschi, Torbjörn Hartman, Bo Höistad, Roland Pettersson, Lars Tegnér, Hanno Essén?(Submitted on 16 May 2013 (v1), last revised 7 Jun 2013 (this version, v3)) http://arxiv.org/abs/1305.3913 

Comment by poster Ric Werme:

"There are people skeptical of the recent results, but it’s getting difficult to find where the missing input energy is coming from. The reactors were pre-charged with a small amount of hydrogen so there was no tank of gas; a safety ground wire was removed; the AC power source was monitored for voltage, current and phase variations."

andrewp111's picture

I don't buy this E-cat nonsense. Rossi is a fraud. The tests in that paper were not rigorous and could have been faked through clever means. Some of the testers have been his partners for years. I wouldn't believe it unless I did the tests myself with completely rigorous controls.

FeralSerf's picture

I don't know if Rossi is a fraud or not. It doesn't matter much at this point. I am sure, though, that Dr. Tadahiko Mizuno is NOT a fraud. LENR is real.

FeralSerf's picture

If the (uber-criminal) business model of The Elites is to be maintained, (i.e. control of the price and availability of energy to the proles), Rossi and his ilk must be eliminated, (i.e. killed like Tesla was).  The Elites may have waited too long to do this.  China and India, energy poor (currently) for their populations, may not get on board the western Elite's program to eliminate this source of apparently very cheap and plentiful energy.  I think the energy "cat" is out of the bag!

The other way back to Elite absolute control is through the financial manipulation (with the military option) that should be so obvious now.  There is a huge amount of "collateral damage" associated with that path, probably requiring the deaths of billions of people and the laying waste of much of the planet.

willwork4food's picture

That might be true, but it would require drastic authoritarian control over the member states, which might or might not work. The primary question is: Would they really let the western world's military devolve into a piller of financial ooze?

bank guy in Brussels's picture

Though Jim Sinclair did shift in his euro-zone view, and now Jim admits the euro-zone may split into at least two pieces as far as the currency area is concerned

Which I think is more than correct. The Mediterranean countries absolutely must leave the euro, including France, but it suits the northern Germanic-majority countries perfectly well. Our economies have converged and basically operate in the same parameters.

To me that is how it will play out. Germany, Austria, the Low Countries, and Finland, will all keep the euro ... and after the blow-out of the south and the big global re-set generally, I even think it probable that Sweden, Denmark and even Switzerland (which is not in the EU !) will start to use it