Which Door Will Yellen Choose?

Bruce Krasting's picture


Two theories to explain the year-to-date global dumpathon. The first is that it's all local issues - no single macro story explains the depth of the sell off. Some examples (and why they are individually no big deal):


+ Turkey is facing big domestic political/economic problems – it’s no surprise that some of the ‘air’ is coming out of the currency, bonds and equities that were so recently loved. All in, Turkey is now cheap – one should buy this dip.

+ South Africa is facing labor issues. This explains the drop in the Rand. This is not a ‘contagion’ story. It’s an isolated case.

+ Brazil is temporarily suffering from some weakness in other EM markets. But Brazil is a ‘special’ case – this is the land of the future.

+ Argentina’s deval is a good thing. Every time that Argentina has hit a wall over the past 30 years they have gone through this, and came out strong. Buying this dip will be a moneymaker.

+ Japan is going to ‘Whip Deflation’ in 2014. The coming 40% increase in the national sales tax is not going to be a speed bump at all. The (still) cheap currency that has been engineered is about to trigger an export boom. Japan has the ‘Platinum Coin’ option, and it will use it to eliminate the debt problem.

+ Europe is really in ‘recovery mode’ this time. All the evidence you need to confirm this is that Spanish ten-year bonds were sold the other day (in size - E13b) at a dirt cheap 3.75%. The offering was 3Xs oversubscribed.

+ The ‘worst case’ in Puerto Rico will never be seen. Treasury Secretary Jack Lew will ape Mario Draghi and pledge that PR will not default. There’s big money to be made in PR bonds.

+ China’s latest ‘blip’ in funding costs is going to go away as of Feb. 1 (New Year). The fact that there will be a default of a Wealth Management product in a few days is well known - it's already in Friday's market print. China Inc. will not allow defaults to spread. And what’s all the complaining about? GDP of 7.5% is in the cards.

+ The US is going to have the best year of GDP growth in years. The higher corporate top line/earnings that will follow this economic spurt will keep multiples expanding. Janet Yellen has confirmed that she’s going to keep the short end at zero for years to come, so the Fed’s put is alive and well. Buy this dip!

+ The US picture is bright because of all those new holes that are being pounded into the ground from Colorado to Pennsylvania. For the first time in decades crude is a short. $75 WTI is in our future. As this evolves, there will be no meaningful consequence to Saudi Arabia, Iran, Iraq, Indonesia and it will not hurt Mexico a bit.


The “spin” on the foregoing issues have the same theme. They are isolated issues that are (for the most part) not really interconnected. Yes, those issues are causing some markets to adjust, but there is no case to be made for a single source of the global puke-out. And anyway, there is a positive side to all of this.


But there is another take on this story. All of the issues that are emerging have one common thread – It’s the Fed’s Taper that is behind all the uproar.


Is this possible? Can a relatively small adjustment in the supply and demand equation for the US bond market be responsible for the rout? I think the answer is “Yes”.

The real question is what does Janet Yellen think is behind the global sell off. I’m as certain that I can be that Ms. Yellen is itching for an excuse to extend (expand) QE. QE is, after all, her ‘baby’.

Next weeks’ Fed meeting is supposed to bring us another notch down in the QE monthly purchases – at least that is what the WSJ’s Jon Hilsenrath told us a few days ago (link). Given what has happened since then, the possibility of a Fed ‘surprise’ is now a distinct possibility. Yellen could fall back on the ‘data dependent’ theme, and opt for a pause in the Taper. This translates to a continuation of QE at the rate of $75B a month for a bit longer.

What might be the consequences if Yellen does a U-turn on the Taper? The hoped for result would be a rapid turnaround for the EM markets, and with that, the US market would quickly revert to green. Happy days would be here again. There are enough people who believe in the magic of QE that a suspension of the Taper might be sufficient to turn the global capital markets back to stability (Yellen is on top of the list). But that outcome is by no means assured – a delay in the Taper could backfire. The difference between QE of $75B a month versus $65B is meaningless. The markets are not that dumb - it will just take a few days for markets to reach this conclusion.

We have only two scenarios:


1) Yellen opts for a continuation of the Taper and we have an immediate blowout in the EM economies/markets or,

2) She delays the Taper and holds QE at $75B for "a few more months". The next leg down in markets would start in less than a week as reality/disappointment set in.


Both of these outcomes have a bad ending. Either way, the concept of the "Fed Put" is about to be tested. Seat belts should definitely be worn (tightly) next week.




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jonjon831983's picture

It's all about the FED/US.  When FED/US has pretty much been the lynchpin of the global economy built around them for decades. Pulling a string here or there will have ramifications throughout the system. What we have been seeing so far is where the tendrils have gotten their fingers - with just a "small tapering".  A larger taper would expose more of the current system.


This will put those dependent upon the system in line (ie. biotches you're OURS so do what we say... or ELSE) and ... conversely force acceleration in development in alternative plans... possibly drive different parties into separate groups for protection/economic reasons to shield themselves from the existing system.  Another possible add on is the taper effect is a test run to see what could happen.


(On a more positive/less menacing view, you could say this is signaling by the FED/US to partners - protect yourselves, we're going to get into a bumpy ride vs. we're the overlords do what we say. Take your pick.)

Yancey Ward's picture

I have long predicted that QEIII would see $100+ billion/month purchases before it ever saw zero.  I think the Fed will roll the dice and do another $10 billion cut at the next meeting, but that will be the last one for a long, long time.

Carl Popper's picture

For the posters who point out there is no real growth, there has been no real growth in real wages since about 1972 for the average worker.

Thank two worker families, fewer children, money illusion, and the magic of hedonic substitution (i actually like beef hearts and rice. I dont need sirloin tips)

Your world has been a mirage for a long time

LawsofPhysics's picture

Correct, but what else should we have expected?  Especially once the monetary system itself (money) was detached from reality.

In addition, do we all really think that this biosphere (the earth) will tolerate infinite growth of a single species?  Good luck with that.

satoshi101's picture

You give the USA way too much credit, they only havd the power to KILL & DRONE,

THe world NO longer respects the USA, and USA 'democracy' is the joke of the world.

The USA can keep printing to INFINITE and bail-out goldman-sachs bad loans in CHINA, EUROPE and USA,... but eventually the USA will implode from within, the GOLD-MAN SACHS will create a 'new world order'  with the IMF printing all the money, and they will make the CHELSEA CLINTON the WORLD UN Leader of FIAT, ...

End of History

honestann's picture

Remember one fact about the situation Yellen is in.

She is a one-armed bandit.

That's right.  Previous fed chairjerks have been able to lower interest rates to accomplish their nefarious goals.  That arm was effectively chopped off when interest rates reached zero, where they still sit.

Don't imagine that Yellen is not aware of her amputated arm.

True, compared to historical situations (before 2008), they added a new arm, which they call QE - which at least has the "virtue" of being something real.  They also added jawboning (which is just talk), but I think most people realize the federal reserve is now an advertizing agency, and their words are nothing but self-serving spin.  Which means, their BS has less effect every month.

So... what?

The fact is, deep down, Yellen probably wants to raise QE, and certainly not reduce QE.  And all she had to do to get her justification was... do nothing.  Specifically, she only had to give instructions for the federal reserve to STOP "secretly" buying stocks left and right for a couple weeks.

Yellen certainly knows what happens without this constant flow of fake demand.  And the result is... her excuse to not taper further.

Now, I'm not entirely convinced this is the time she wants to surprise by announcing she is raising monthly purchases (too early in her term), but she certainly may have set herself up to stop the reductions, and also set herself up to reverse the taper in the near future.

These people are so transparent... if you understand what they really want, and understand the nefarious, diabolical ways they prefer to get what they want.

And if she does taper?  Then her reason is to make investors panic so extremely that she will have almost everyone on the planet begging her to stop or reverse the taper, and thus have no personal risk from doing so.  That could be too, and certainly fits their perverted mindset.  However, my guess is, it may be a bit early in her term to start playing that game.  Maybe.

the grateful unemployed's picture

her situation is very similar to obamas in 2008, coming to office after a long period of extreme policy maladjustments, requiring at least some reverting to the mean, and perhaps even some mopping up a little (justice is the term), and we all know how that came out. if you want to compare the economy to iraq and afghanistan, please do, the can can always be kicked a little farther (and then down the road, if you are the fed you simply throw your hands in the air, hand your debt back to UST, or go off-balance sheet)

Husk-Erzulie's picture

Ann, I like your analysis.  As Janets political advisor I would advise her to take the last option; shake things up, scare the shit out of the less astute players and, like you said, get everybody begging her to do high octane, balls to the wall QE.  This is the bold action to put her in control of the game and the optics (I tried too do the 'right' thing, but you people freaked).  And yes, the end game is currency breakdown and reform... it's not a crisis if you know it's coming, and you know the timing; it's been done before, the mechanisms are known, it's recoverable, and, for the properly positioned, it will be profitable.

honestann's picture

Wow, you are Yellens political advisor!!!

satoshi101's picture

Before YELLEN won, she said "I will bring negative rates"

She will bring them, ... this is a new tool.


This is a 2nd arm, or a new arm, or maybe this bandit is like some Indian Godess with 1,000's arms.


Carl Popper's picture

I will agree with you on that.

You took the wrong name if you believe in statism and crony capitalism Singapore style.

Bitcoin is for liberty

honestann's picture

Well, if you want to call "bail-ins" another term for "negative interest rates", go ahead.  I understand your logic, but I won't adopt that terminology because there is a big difference in my mind between "outright stealing your money" versus "offering a negative interest rate".

Why?  Because when they offer negative interest rates but do NOT steal your money, you can take your cash and buy gold (and endless other real, physical, valuable goods).

To me, that's a huge and fundamental difference.

But I do understand (and agree with) your belief that the predators-that-be have zero scruples, and will do anything whatsoever to abuse and control.  No question about that.

However, they don't want to cause a stampede, they want the sheep and cattle to stand still while they rape them, fleece them, chop them to bits, and consume them.

BTW, the other rather equivalent way they'll achieve similar results is to force financial institutions to convert a percentage of retirement funds into US bonds.  And they might also change the rules so the penalty for removing money from retirement accounts rises from 10% to 25% or 50% or 80% - which has similar results.

the grateful unemployed's picture

semantics is the best weapon when it comes to committing crime. if it comes to negative rates they have to admit they are managing a deflationary collapse, and that would be a uber-transparent moment for sure. with the EM currencies plunging will the USD have to beggar the neighborhood? bernanke avoided the shrinkage to money that occurred in the 1st GD, by printing more, but the forces behind it have returned. if they try to stick to inflation fights deflation, they will have to expand QE by giving some of it to US, you and me, and not just the big banks. more QE while shrinking the monetary base? once before Greenspan used a policy of raising rates, gradually, while increasing liquidity, and it worked. incremental rate hikes, and plenty of POMO and REPO, no QE.

satoshi101's picture

Sure, now me and you are just picking words, long ago YELLEN used the word's 'Negative Rates'

I prefer we use the CYPRUS words "Hair-Cuts'

It really doesn't matter what words are used, we know what they mean.

The BANDIT has many arms, and they see lots of CASH in the money-market and the banks and they want that money out their being spent, and they see it AS THEIR MONEY, Not your money.

This is probably the biggest fault with the FRN ( reserve note ), is its  currency, and not really your money,

But its here nor there, and your original post only focussed on the FIAT issue of print-to-the-moon, aka QE to finance US-Treasury, ... but there are many other way's to finance treasury, such as direct theft, aka CYPRUS.

Like it or NOT long ago YELLEN promised "Negative Savings Rates".


satoshi101's picture

American Democracy is DEAD, and thus all nations will abandon Democracy for Dictatorship


The USA  'BRAND' is now tarnished adn all nations on earth have given up on 'mass rule' and winner (moron) take all and voting.

western democracy is damaged. When developing nations look to the democratic West, they see a dwindling and weakened superpower in America. Meanwhile, Europe has economically imploded, and anyway seems determined to abandon national liberties in favour of a feeble, mincing Federation, run, ineffectively, by bankers and bureaucrats.

The contrast with the success of the Chinese/Singaporean model is stark. Autocratic China is still enjoying powerful growth: it will soon surpass America in economic size. Singapore, meanwhile, has gone from equatorial backwater to being maybe the richest city in the world, without ever bothering too much with that annoying, listen-to-the-voters stuff.

So if you were a developing nation – especially in Asia – which political model would you choose? The western democratic model of failing France, enervated Britain and shrinking America? Or the Chinese and Singaporean style of politics, which actually delivers the goods?

honestann's picture

Yes, if you were a developing nation in Asia... then I agree with your logic.  However, only a few developing nations elsewhere will come down on that side of the fence.  For example, look what Panama just tried - the typical western predator approach, even though their entire reason for success has been posing as a place to avoid western predators.

Never forget the primary dynamic.  What is that?

#1:  People who invest all the time, effort and nefarious behavior to gain power, are people who lust for power.  So when they get power, they just can't stop themselves from being the predators they are.

#2:  Almost all humans today, including predators, are increasingly short-term oriented.  Their approach is to grab wealth and abuse the system and people as much as possible, as fast as possible.  This does not make for a natural or healthy economy (or natural or healthy anything else).

The fact is, you are only correct because the tendency towards longer-term thinking has been burned into the consciousness of almost all Asians from a very young age.  Even those Asians who turn to the dark side are influenced by ideas firmly burned onto their psyche since birth.

For evidence, notice that you can find plenty of evidence for utterly rotten, craven, nefarious, diabolical power-abusing Asians in the history of Asia, including the past 50 to 100 years.  So while you are correct, and there are reasons you are correct, my advise is:  don't count on it (in any specific case).  But as a tendency, you are correct (compared to the western world).

satoshi101's picture


I'm just calling it as I see it, ... its already happened in the USA, the visual DEMOCRACY is a joke, and GoldmanSachs/AIPAC control all behind the scenes.

Hong Kong doesn't allow  the dumbest voters to control the money decisions, that has long been left to wise men.

The world looks at ASIA and they LOOK at EUROPE and see total failure in the west and economic success in the EAST, everyone will now copy that model.

I'm not saying I like, just calling it like it is,

p.s. I live in remote south china, 2-3 days from any civilization, totally self sufficient, ... so none of this shit effects me one iota, ... I will never live in a city again, but western city's are going the way of 'blade runner' and chinese city's are going the way of The Jetsons.

Just saying.



honestann's picture

I don't want to harp on this, but I can't help but point out that "democracy" is a form of slavery and authoritarianism.  So I don't consider "democracy" (in pure form, or any of its perverted forms) to be something good.

If my neighbors can vote my stuff belongs to them, and my life belongs to them, then I am just as much a slave as if some king or emperor claims I am his slave.  In fact, I would much rather a king or emperor claim I am his slave than live in a democracy, because careful preparation and one bullet might be sufficient to "free" myself from a predator-king or predator-emperor.  But if 51% of everyone around you claims you as a slave, our remedy is quite a bit more difficult.

PS:  I also live an almost completely self-sufficient life, far from uncivilization.  The nearest humans live about 125km from me, and that town has about 100 people.  So we're definitely on the same page, except I chose the southern hemisphere.

STP's picture

I gave you an up arrow, because you're absolutely right.  The US was set up as a 'Republic' and only property owners were allowed to vote.  I live in California, the ultimate cesspool of  "Democracy", where power-hungry organizers, round up the poor to protest against nearly anything and the lawmakers never stop with the endless expansion of government, regulations, taxes and fees.

Carl Popper's picture

False choice

Also cause and effect all wrong.

Shouldnt waste my time, but "China eat the world" posters annoy me.

satoshi101's picture

Everywhere in the world, the model of France and/or USA, where morons control the outcome, and the greatest morons elect the man who promises the most transfer.

The RICH are sick of GOD DAMN fucking 'democracy'

It's not about CHINA, its about SINGAPORE model, and they're the richest asian country, where the RICH rule, and the poor have no say.

Everybody is now going with this model.

This is the only future for the world

theprofromdover's picture

Which door?

She'll just cut a new door.

She has to continue the taper to fool enough folks that everything is under control, but at the same time she is scared sh**less that if she stops printing money the pretty world will collapse. Janet, it is supposed to collapse, that is the solution.

satoshi101's picture

There will be NO taper, cuz nobody wants to BUY US-DEBT.

The only BUYER on earth for US-DEBT is the FED.

It's going to be this way forever now, or until the US-MIL can't back it up, given the US-MIL has 300-500 years of coal/oil...


I will also in MY opinion we already know that the FED has 'loaned' trillions to europe since 2007,  I also think the FED is sending trillions to CHINA/ASIA to cover goldman-sachs banks there too.

kurt's picture

Is it me or is every item listed a soft soap, greeny sprouty, put put golf, whitewash, poofy, tainted with lucky charms, spun, cnbc-like, BULLSHIT?

Look out below.

kchrisc's picture

Regardless of which "door," the American people will get the goat. And it will probably be dead to boot.


"Guillotines are renewable--they can be used over and over again."

Kreditanstalt's picture

I have NO IDEA how this writer fails to see the forest for the trees.

Brasil, Turkey, South Africa, etc., etc....yes, they are discrete events to be sure, but lack of faith in counterparties is common to all of them.  Why can't he see that???

CREDIT EVENT coming up! 

John_Coltrane's picture

Yes, the world financial system is like the circulatory system of the body.  When a crisis hits, the blood (capital) flows back to the critical parts (the developed West, especially the US), and if you lose an extremity or two (say the EMs) at least the major organs continue to function and life goes on.  And you suppress commodity prices as a bonus. 

There's only one principle the FED must follow, suppress interest rates to hide the untenable debt problem.  If they need to crash the inflated equity market to get control of the rates and prevent the inevitable debt default and destruction, they will do it just like they did in 2008.  You can take that to the bank (pun intended).

satoshi101's picture

No Problem,

FED is financing the US-DEBT,

FED is bailing out bad-debt in EUROPE

FED is bailing out bad-loans in CHINA

Do you really think the FED will not bail out all BAD shit in all BRIC's ...?

It's the nature, of the FED,

It's called the curse 'reserve currency'

If the USA wants to keep it, this is the way it must be played.


1.) kill your own people

2.) offshore all your jobs

3.) murder the world, that doesn't trade with your reserve currency,

4.) bail-out the worlds bankers to keep them using your reserve currency


epwpixieq-1's picture

"Which Door Will Yellen Choose?"

There is No Door it is just an illusion on the Wall and we are going 100mph towards and of course she could decrease the speed but regrettably we are on a slope and ones the speed is  decreased with are sliding back.

kchrisc's picture

Those that really understand what's going on and how the system of theft really works will see the tragic conundrum: Their system of theft requires more and escalating levels of theft to maintain it.

The ONLY two questions is whether they will hit a wall or implode and how many will loose their heads.


"The part of a guillotine that holds the head in place is called the 'lunette."

mister33's picture

it's going down. i'm Yellen timber.

nmewn's picture

Well, at least we now know the author can edit the title, if he choses ;-)

Bruce Krasting's picture

My new editor is from Sochi. Dark, beautiful and young. She does struggle with English, and has trouble with past and present tenses.

What should I do? Fire her for the gaff? Not a chance......


Fuh Querada's picture

not surprised - Russian has no articles and only one past tense. To compensate though, a lot of other crap like 6 cases and 3 genders

Trucker Glock's picture

The only door left has a goat behind it.

SAT 800's picture

Ancient Persian, (Sufi), saying; "Don't have any problems in your life? Buy a Goat". 

dust to dust's picture

  The fields in WY. are as productive as the Big ONE in eastern MT. and N. DK. and better rock specimens in the field. I know working the area outside CODY, WY. BIG WIND.

I Write Code's picture

Hey, who knows.  Nobody, that's who.  Cuz nobody know what or how the Fed has been supporting equities.  Nobody I've talked to anyway.  "QE" is not the answer, can't be, how does that money get from the Fed's helicopter to the GM ticker?

Yellen just hasn't intervened *yet*.  Give her a day or two.  The Dow and all the equity markets have gotten ahead of themselves, so when any legit reasons for decline came, and decline started, Ms. Janet just let it flow.  I think even Ben would have ignored things so far, that's the pattern we've seen for at least five years now, let the market rope-a-dope itself and then when the momentum slackens, intervene.

HardlyZero's picture

Banks and businesses borrow ZIRP loans and buy stocks.  EZ.   It is just a different type of leverage.

HardlyZero's picture

Legarde asks Janet and Ben to keep pumping and don't give up.

AGuy's picture

"Legarde asks Janet and Ben to keep pumping and don't give up."

Reminds me of this song from Fleetwood Mac:

If you wake up and don't want to smile,
If it takes just a little while,
 Open your POMO and look at the day,
You'll see things in a different way.
Don't stop, thinking about tomorrow,
Don't stop, it'll soon be here,
 It'll be, Bigger than before,
Yesterday's gone, yesterday's gone.
Why not think about times to come,
And not about the things that you've done,
 If your QE was bad to you,
Just think what tomorrow will do.
Don't stop, thinking about tomorrow,

satoshi101's picture

Yellen will do nothing, we all agree.

I hear nothing about her 'negative interest rates', that is coming.


They have a plan, it will be same-same until HILLARY-2016, then Hillary/Yellen  will declare the FED do bad with QEx, and replace FED with IMF-SDR.

Then all on ZH will cheer "FED is DEAD"

Then the real HARD-FUCK begins.

The US-MIL backs the IMF-SDR, and the entire 'politically correct' world lines up to draw as much FIAT as they wish.

Goldman Sachs gets anohter 500 years, and the SQUD moves beyond just controlling the earth.

falak pema's picture

Lagarde summed up this conundrum very well in Davos when she garbled on about riSK, Reset and restructuring.

The biggest R being Risk ... as Tapering, as ongoing currency wars hotting up, will make Reset and Restructuring in DCs impossible as in First world.

Too many ballls up in the air; unless you be on Buffet and Dimon team.

new game's picture

if only we knew what was really happening...

SAT 800's picture

Cheer up; you know as much about what is happening as your "leaders".

Wahooo's picture

Mexican standoff.  No wonder the mints can't keep up with gold demand.

HardlyZero's picture

Bingo.  And the EM currency collapse/selloff is the sign the QEx is getting tapered, and that has huge impact to the 'carry trade'.  No US FED ZIRP fiat finance (taper occurs) means no one is supporting the EM currencies and markets any more.

The whole QEx carry trade by foreign stock/bond/currency investors was funding the world at the margin.

It is going to be a rough ride on the way down.

lawton2's picture

The GDP in the US in reality probably barely grew at all despite that fantasy 4% number they threw out there. As far as China's GDP looking at other indicators it probably grew only about 3% not the fantasy 7% plus they put out there.